Tax Preparation Tips from Jeff Brooks CPA in Phoenix and Scottsdale, AZ

 THE BEST TAX LOOPHOLE IS CASH BASIS INSTEAD OF ACCRUAL BASIS. CASH BASIS VERSUS ACCRUAL BASIS: WHAT IS THE DIFFERENCE BETWEEN AN ACCRUAL AND A CASH BASIS AND WHY IT IS IMPORTANT TO KNOW THE DIFFERENCE?

You are very fortunate  if your business is allowed to use the Cash basis.

 

Why? Because the cash basis is easier to understand and easier to manipulate to reduce your personal income tax.

 

Why? You can legally reduce your business taxable income and personal income tax by simply deferring revenues into the next year by invoicing or charging closer to the year-end.  The IRS cannot force you to invoice  or charge on a given date.

 

Building up your business and personal cash is similar to a bleeding patient getting  a blood transfusion.  The problem is that most business owners do not understand when sources of cash from sales/revenues are deposited in the bank for the business, personal taxable income goes up.

 

Warning: When you receive a payment from a client/customer and fail to deposit it until the following year, it is still taxable in the current year because you had what is called “constructive receipt” of income because you could have deposited the funds in the current year.

 

So what should be your goal? Your goal is to reduce the GAP between business taxable income and your total cash and liquid investments.

 

The key is you need to focus on keeping the  of cash for personal use low until you build up a nest egg and you have excess liquid investments!

 

One way is to monthly compare how much you have in year to date  taxable income compared to total liquid assets that can be used to reduce taxable income and pay any tax due.

 

There will be a time if you work hard and  build your business profits that you will be able to enjoy the “fruits of your labor”. For me it was after I had been in business about 10 years at age 44. We then started spending more money on fun travel, eating out , entertainment and other living expenses.  Of course, when we could legitimately get a business tax deduction, we would take advantage of the generosity of Uncle Sam.

 

Let us look at this GAP.  At the end of  your businesses year end, you and your business have total liquid assets of $50,000 but your business taxable income was  $200,000.

The most that taxable income that can be reduced down on a Cash Basis it to $150,000.

However, most business owners do not understand the importance of narrowing this negative “GAP” between cash available and taxable income!

 

On the other hand, if you and your business have access to $140,000 of liquid assets and there are payables, accrued payroll and expenses due in the following year, taxable income could be reduced down to just $10,000.

 

However, we may not want to get taxable income down to $10,000, because we may be in too low a tax bracket this year and have a harder time next year getting down to a lower tax bracket.

 

Maybe  you and your business has access to liquid investment  of $60,000 instead of the $50,000 mentioned earlier.  Of course it would be better to have the $140,000 than just $60,000 but it is better having the $60,000 instead of the $50,000.  With the extra $10,000, you will save up to $5,000 if you are in the combined marginal federal/state tax rate of 50%.  If your marginal tax rate is just 35%, you will save $3,500.  If instead you used the additional $10,000 to pay off some personal debt with an annual interest rate of 5%, you would just say $500 in non-deductible interest!  The best choice would be to use the additional $10,000 in liquid investments paying tax deductible expenses for your business.

 

And if the business vendor allows a discount for prepayment of business expenses, you will obtain additional savings!

 

Hey, I just had another idea. Your mom, dad, sister, brother or uncle only gets .3% interest at the bank and loves you and wants to help you!  Show them this paragraph. Have them loan you the money and then you loan the money directly to your business. Your business pays you the same interest rate that you will pay your relative.  If you borrow $20,000 and save $7,000 in tax, you just made an annual return of 35%! Not bad?

 

However, there are cases where accrual basis will give you a tax advantage over cash basis. We will discuss in another blog in the future.

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!

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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.

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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