An accounting method is a set of rules used to determine when and how to report income and expenses in your books and on your income tax returns. Selection of an appropriate accounting method is very important as it can have a major impact on the taxes you pay as well as your ability to obtain financing for your business. Consideration of appropriate accounting methods is included in our new corporation packages.
More than one accounting method may be employed under certain circumstances. Different accounting methods may also be required for different taxes. There are two basic accounting methods.
There are also many other methods of accounting which may be appropriate in various situations and specific industries.
If you need inventories to show income correctly, the IRS position is that you must generally use an accrual method of accounting for purchases and sales. Inventories include goods held for sale in the normal course of business. They also include raw materials and supplies that will physically become a part of merchandise intended for sale.
The IRS might require you to use the same accounting method to figure your taxable income and to keep your books. Also, you must use an accounting method that clearly shows your income. In general, any accounting method that consistently uses accounting principles suitable for your trade or business clearly shows income. An accounting method clearly shows income only if it treats all items of gross income and expense the same from year to year.
More than one business. When you own more than one business, you can use a different accounting method for each business if the method you use for each clearly shows your income. You must keep a complete and separate set of books and records for each business.
Changing your method of accounting. Once you have set up your accounting method, you must get IRS approval before you can change to another method. A change in accounting method not only includes a change in your overall system of accounting, but also a change in the treatment of any material item.
Warning! If you do not select a proper accounting method in a timely manner, the IRS will select one for you. In general, the IRS favors accounting methods that maximize the amount of taxes you must pay.
Related items:
Cash Versus Accrual
Example
Consulting
Services
Federal Tax Identification
Numbers
Income Tax Year
More Businesses Can Use
The Cash Method
Small Business Services
Tax Services
© Copyright 2000 Raymond S. Kulzick. All rights reserved. 001029.
This publication provides business, financial planning, and/or tax information to our clients. All material is for general information only and should not be acted upon without seeking appropriate professional assistance.