CASH OR ACCRUAL ACCOUNTING

Is your business on a cash or accrual accounting basis? You may have had the question asked and were not sure how to respond.

One of the first decisions you will need to make when starting a new business is what accounting technique you will use, cash or accrual. There are differences between the two but primarily the distinctions is the timing of transactions. There are pros and cons to each and you will need to examine examine them before determining which approach to use in your business.

Most small businesses can select their method but others are not able to. Any time your business meets either of the following two criteria, you need to use the accrual method:

• The sales for your business exceed $5 million annually or

• You have an inventory of items that is held for sale to the public along with gross receipts exceeding $1 million per year.

Most small organizations choose to use the cash method of accounting. Under the cash method, income is recognized when it’s received, not when you bill a client. Expenses are similarly recognized when the money is paid out, not each time a vendor bill is received.

Accrual accounting is based on when transactions take place as opposed to when you receive or pay out cash. Even for those who have not yet received the money from a client, income is recognized when the sale takes place instead of when you receive the cash. The same holds true for recognizing expenses; you do so when you receive the goods or services, not when you actually pay for them.

The accrual method of accounting often times will show you a more accurate picture of how your business is performing because it follows the income and debts.   However,  the accrual method does not always give you an accurate image of cash readily available. Not knowing how much cash on hand a business can lead to cash flow problems.

When a business is growing, often times it will have more accounts receivable than accounts payable. Using the cash method in this case would create a decrease in tax burdens, since earnings are recognized only when received.

Choosing which method of accounting to use for your business is a big decision and should be discussed with your tax or accounting professional.

New Homebuyers Credit Rules and Tax Filing

The IRS has recently released Form 5405, the form that will be needed by elgible homebuyers to claim the first-first time homebuyer credit this tax season. Processing of those tax returns will begin in mid-February after the IRS completes the updating and testing of systems to meet the law’s new requirements. The updates will allow the IRS to put in place critical systemic checks to deter fraud related to the credit.

In addition, there has been an announcement that new document requirements will help deter fraud previously related to that credit. The new form and instructions follow major changes in November to the homebuyer credit by the Worker, Homeownership, and Business Assistance Act of 2009. The new
law extended the credit to a broader range of home purchasers and added the new requirements. Some of these early taxpayers claiming the homebuyer credit may see tax refunds take an additional two to three weeks.

In addition to filling out a Form 5405, all eligible homebuyers must include with their 2009 tax returns one of the following documents in order to receive the credit:

• A copy of the settlement statement showing all parties’ names and signatures, property address, sales price, and date of purchase. Normally, this is the properly executed Form HUD-1, Settlement Statement.

• For mobile home purchasers who are unable to get a settlement statement, a copy of the executed retail sales contract showing all parties’ names and signatures, property address, purchase price and date of purchase.

• For a newly constructed home where a settlement statement is not available, a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate.

In addition, the new law allows a long-time resident of the same main home to claim the homebuyer credit if they purchase a new principal residence. To qualify, eligible taxpayers must show

• That they lived in their old homes for a five-consecutive-year period during the eight-year period ending on the purchase date of the new home.

• The IRS has stepped up compliance checks involving the homebuyer credit, and it encouraged homebuyers claiming this part of the credit to avoid refund delays by attaching documentation covering the five-consecutive-year period:

o Form 1098, Mortgage Interest Statement, or substitute mortgage interest statements

o Property tax records or

o Homeowner’s insurance records.

If properly filed, those homebuyers filing early can expect the first refunds based on the homebuyer credit will be issued toward the end of March.

5 Times a Winner with Donated Appliances

Everyone is a winner when you donate appliances to charitable entities.
• The obvious is your tax deductible donation.. You can take the estimated value of the appliance off of your taxable income and save some money.
• The charitable organization will, often times, pick it up, saving you time and energy.
• You save the cost of the disposal fees at the landfill and, as long as the appliance is in working order or can be refurbished, there is no need to add it to the piles of junk. In addition, you are giving another family the possibility to use it.
• Since many thrift stores and charitable organizations often donate money to other non-profit organizations in the community, you are supporting many great causes.
• Many people need low cost alternatives to furnishing their homes.
In the end, you help yourself, the environment, needy families and possibly even members of your own family.

Tax Preparer Regulation

The Internal Revenue has announced that it will investigate a way to regulate tax return preparers currently operating without any government oversight.  Currently public accountants, tax attorneys and enrolled agents have to comply with minimum standards for training and registration but, other preparers simply set up business and work on taxpayer returns with no education requirements and no need to register with the federal government.

The State of California currently “requires” preparers to take minimum education and to enroll in the  CTEC program but, to this point, it has been a joke with preparers able to take online education which doesn’t update their knowledge nor does it require that the preparer is knows  about law changes. Other state regulation of preparers varies widely with only a few states overseeing their operations. The IRS doesn’t know how many tax preparers are in business nationwide, though estimates range from 600,000 to 900,000 and currently there is no national standard regulation of paid tax-return preparers. Virtually anyone can set up a tax-return preparer business. The Internal Revenue Service said Thursday it will investigate ways to regulate the hundreds of thousands of tax-return preparers currently operating without any federal oversight.

While certified public accountants, tax attorneys and enrolled agents must comply with minimum standards for training and registration, many other tax preparers nationwide simply set up business and start working on taxpayers’ returns, with no education requirements and no need to register with federal authorities.

Meanwhile, state regulation of preparers varies widely, with only a few states overseeing their operations, the IRS said. The IRS doesn’t know how many tax preparers are in business nationwide, though estimates range from 600,000 to 900,000. Even tax preparation software developers may find their practices examined in this review process.

The IRS investigation may result in new standards of ethical conduct to training and education requirements to registration and licensing.  The IRS can already go after those preparers who engage in fraud and can impose penalties for other conduct but the tax agency wants to ensure that all preparers are ethical and provide good service to their clients and are qualified.,

In a  study  done last year, returns completed by unlicensed paid preparers, 17 out of 28 — or 61% — were prepared incorrectly. The IRS review process will involve getting input from a diverse group of people, including preparers and taxpayers. Later this year, the agency will hold a series of public meetings nationwide.

While unlicensed preparers may find stricter standards coming their way eventually, plenty of other tax professionals foresee no changes for themselves.  Attorneys, CPAs, enrolled agents and enrolled actuaries are all covered by Circular 230 which as rules and regulations as well as punishments for negligent or unethical practices.  Tax professionals are assigned PTINs  (practitioner taxpayer identification numbers) and the IRS can sort all the returns by the PTIN, to examine for preparer improprieties. The IRS may eventually require similar ID numbers for all tax preparers.