Deferring Your Tax Burden

Wegmann Dazet Senior Tax Manager Richard Tullier on Deferring Your Tax Burden

One of the biggest challenges affecting every growing business is #CashFlow. As your business grows you need cash the most, but that may be the hardest time to get it: vendors don’t know you well, so they want their money now; and to new customers, with whom you hope to gain favor, you extend credit via your accounts receivable collection delays. And then Uncle Sam says, “Now it’s my turn to collect.” (It’s the same catch-22 many face in borrowing: you need to get credit to establish credit history, but without established credit history, it’s hard to get credit.)

Take heart…and consider cash based accounting.

There is a cash flow upside in the answer to “Accrual based or Cash based for your business?” Why is this distinction important? In the simplest terms, Accrual based businesses take deductions when they get a bill and they recognize income when they send out an invoice, all regardless of when cash comes in or goes out. This leads to the Tax Man collecting on all that income you have accrued, even though you haven’t collected it yet. Cash based businesses, on the other hand, are the old lemonade stand: you report income when you get cash and report deductions when you pay out cash. Cash basis accounting is the simplest way to pay taxes: you pay on collections received. Paying taxes only on money you have received = improved cash flow. It’s that simple.

The good news for cash based accounting is that recent tax law known as the Tax Cuts and Jobs Act has simplified the rules. While there used to be multiple, convoluted, complex, complicated, and confounding rules about when a business could use the Cash Method of Accounting, there is now only one revenue restriction, $25 million, making it simpler for businesses.

So before Uncle Sam says, “OK, now it’s my turn to collect,” don’t feel like you are Uncle Pennybags with your pockets empty after paying out all of your cash to vendors while still waiting for your customers to pay you. Consider cash based accounting.

If your receivables are more than your payables and you are not on the cash method (or if you just want to learn more about it), click here or give us a call. We are happy help. Cash is king. Let us help you grow the king.