If you use the accrual method of accounting, the way you account for your business records varies from the accounting you need to embrace when you file your tax return. There are several different elements that need to be changed. Here are some of the accounts that need to be reviewed at tax time.
With accrual accounting, you count revenue as it's earned rather than as it's received. As a result, your revenue number may contain a lot of sales from clients who haven't paid their bills.
Typically, on your tax return, however, you will only report the revenue that you have actually received. To find the right number, you can subtract your accounts receivables generated this year (money owed from clients) from the revenue you recorded for the year.
You track expenses when you incur the debt rather than when you actually pay for the expense with accrual-based accounting. Unpaid expenses go into your accounts payable records, and on your accrual-based books, these amounts are already reflected in your profit and loss.
However, you cannot claim these expenses on your tax return until you have actually paid them. You may also have prepaid expenses that are not reflected in your profit and loss. These expenses should be included in your tax return because the money has already left your hands.
3. Unrealized gains from securities.
If you have invested in any debt or equity securities, you will also account for them differently. In your records, you generally report unrealized gains and losses due to changes in fair value for most of your securities. Note that held-to-maturity debt securities are accounted for slightly different, but this general principle still applies.
Those unrealized gains or losses are reflected in your income. But you won't actually experience a change in your funds until you sell the investment and realize the gain or loss.
On your tax return, you won't report the unrealized gains and losses. You will just report the realized gains and losses. This is another change that you need to create when you prepare your tax return.
The way you depreciate capital assets can also vary. For instance, in your books, you may decide to depreciate a capital asset evenly over its lifespan. That's the straight-line method.
However, when you do your tax return, you may decide to take advantage of the Section 179 deduction and depreciate the whole asset on your tax return in the year of purchase.
5. Unallowed transactions
Finally, there are some transactions that you will account for in your business records because they affect your bottom line. But the IRS won't let you deduct them on your tax return. For example, an environmental fine is not deductible on taxes, but if you pay one, you will want to record it in your bookkeeping records.
For more information or help with your business tax preparation, contact a professional business accountant today.