Advice on Saving Cash from CPA in Phoenix, AZ – Jeff Brooks

Save Thousands of dollars staying on the Cash Basis method!

By Jeffrey Brooks, CPA, CFP, MBA for JBrooks Wealth Advisors, PC, a Professional CPA and CFP Firm  jeff@jbrookswa.com  602-292-2009  Please consult with your professional tax CPA regarding your specific circumstances!

 

I will simplify by telling you that this is the first year of the business.  If this was after year 1, the explanation might become too complex.   My purpose is for you to understand enough that you can work with your CPA tax professional.

If you do not understand my points regarding Cash Basis and Accrual Basis, you will need to take a few minutes to discuss with your proactive CPA tax professional.

 

Let us look at an example using WANT TO STAY ON CASH BASIS, LLC. year 1:

 

On the Accrual Basis, the taxable Income is $560K.  Why $560K?  $1K of capital was contributed to establish the bank account and issue capital.

 

ACCRUAL BASIS includes balance sheet accounts that result in taxable income (Assets) and taxable deductions (Liabilities) because the income or expense occurred in the current year although the cash receipt and disbursement did not happen until the following year.

 

ASSETS:

Cash $10K

Accounts Receivables $301K (on accrual basis, income will be reported)

Prepaid Expenses         $  50K (on accrual basis, deductions will not be reported)

 

Inventory                             $5K

Fixed Assets, net of depreciation  $245K

Total Assets                                            $601K

 

LIABILITIES/EQUITIES

Accounts Payables    $20K (on accrual basis, deductions will  be reported)

Accrued Payroll         $10K (on accrual basis, deductions will  be reported)

Credit Card Payable   $10K

Capital                       $561K  ($1K contributed+$600K profits-40K draws)

Total Liabilities/Equity                            $601K

 

On a Cash Basis, the profit would be JUST $289K.  Why?  Accrual profit less accrual balance sheet accounts including Accounts Receivables, Prepaid Expenses less Accounts Payables and Accrued Payroll.  What does this mean to you?  You would not have to pay tax on $311K.    If you had more liquid assets from a bank loan to you or personal liquid assets to be loaned to your business, you could pay off the $20K Accounts Payables and get a tax savings of $10K if your marginal tax bracket is 50%!

 

Repetition is the “mother of understanding”. 

Explanation of the accrual versus cash basis:  Remember that on an Accrual Basis revenue is only earned when the customer is billed and earned while expenses are deductible when expense is incurred (not paid). Cash transactions are not relevant to taxable income or expense pm an accrual basis.

An example of an accrued expense (unpaid) would be accrued payroll.  An example of the difference between Accrual and Cash Basis methods would be when your employees are paid every two weeks (called bi-weekly).

One of the two weeks is paid in December while the second week for the end of December is not paid until the next payroll in January of the following year. The Accrual  Basis allows you a deduction in the current year for both weeks because the labor was incurred in the current month.  Although the cash payment will not occur until the next year, the accrual basis allows both deductions in the current year while.   The cash basis allows a deduction in the current year for the week in December paid in December.  

How would we get both weeks of payroll deducted in the current year?  If you trust your employees to not leave your employment with unworked days, you could move up the check date to 12-31.  So, your risk is minimal paying on 12-31 when the payroll was from 12-20 to 1-2.   1-1 is a holiday. The employee could quit on 12-31 and you would be out a part of 12-31, 1-1 and 1-2. However, the savings from the tax deduction might be worth more than the risk of an employee quitting on 12-31.

If you enjoyed this article, please consider sharing it!
Icon Icon Icon
RSS FEED

Search

No Obligation FREE Evaluation: Guaranteed to Reduce Your Taxes

602-292-2009

Name:*

Email:*

Company:

Comments:

Security Code:
captcha
Please enter the code shown above:

About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

Get In Touch

JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com