Why is my QBO reporting accural, but my income tax filing is cash?

By: Valerie Briley, CPA, Founder, and Chief Business Driver, Reveal Business Solutions

If you partner with the Reveal team for your bookkeeping and accounting services, you know that we recommend maintaining your accounting records on an accrual basis. However, most small businesses are cash basis for IRS reporting on business income tax returns. This can be confusing!

Accrual basis accounting matches business revenue and related expenses when they are generated or incurred, not when money changes hands. As a result, an accrual basis provides a more accurate picture of your net income. An accrual basis will provide more meaningful data to help you manage your business profitably.

Cash basis reports income when it is received and expenses when paid. Typically, this results in a mismatch of revenue earned with the cost associated cost of earning that revenue, making net income meaningless. In most businesses, it is impossible to determine your profitability using the cash basis of accounting method.

Regarding income tax filings, the IRS cannot expect taxpayers to pay tax on income not yet collected, nor should it allow a taxpayer to deduct an expense it hasn’t yet paid. Therefore, using a cash basis for tax reporting may make sense.

Who qualifies to be a cash basis taxpayer:

  • Businesses whose average annual gross receipts for the three prior tax years were $26 million or less can generally use the cash method.
  • Qualified personal service corporation, whereas 95% of its activities are in the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, can use the cash method.

Our focus is ensuring you have accurate, timely data to make data-driven business decisions. So, while the team at Reveal Business Solutions does not provide income tax preparation, we do have knowledge of general tax rules. We offer services to partner with you to:

  • Convert your accrual basis managerial financials to a cash basis for tax preparation
  • Ensure your tax return agrees to QBO * Maintain details of cash to accrual or other tax adjustment differences
  • Record depreciation or other necessary adjustments

If you want to dig in, IRS Publication 538 is a great place to start. Your tax preparer should be your primary source of guidance for your set of specific facts and circumstances.

If you have questions or need help understanding your finances, contact our team today!