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To be clear, companies can elect for accrual-based accounting (in which case the revenue is unearned) or cash-based accounting (in which case the cash is taxed
by sheetjs 12y ago
To be clear, companies can elect for accrual-based accounting (in which case the revenue is unearned) or cash-based accounting (in which case the cash is taxed in the year received). In fact, many small businesses use cash-based accounting.
- deleted 12y ago[deleted]
- sheetjs 12y agoWe are talking about income. From the page you linked: > Under the cash method, include in your gross income all items of income you actually or constructively receive during your tax year. Your argument only applies to accrual accounting: > Under an accrual method, you generally include an amount in your gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy. You are referring to that "all events that fix your right to receive the income". That is really tricky since there is no legal obligation to deliver the final product.
- lubos 12y agoYou are right, I've deleted my comment. IRS doesn't allow capitalizing unearned revenue if you pay taxes on cash-basis. But it's not fair to tax payer because then on expense-side, IRS actually forces you to capitalize your prepaid expenses whether on cash-basis or accrual-basis. So I don't agree with this but it's law and you are right.
- edanm 12y agoThanks for posting the correction. FWIW, I think it would be better to leave the original comment, and edit it to say "I was wrong - read below". This way you preserve the context, and also other people who make the same mistake as you (like me!) realize what you think and why it's not true.