Cash Method of Accounting
The cash method is the simplest and most common for small businesses that do not carry an inventory.
With this method: You report or account for income in the tax year that you actually receive it, and You deduct your expenses in the tax year that you actually pay them. (The date you write a check or sign a credit card slip is the day you pay your expense.) [WooZoneProducts asin=”1623155363″][/WooZoneProducts]Some examples: You are paid in 2017 for work you did in 2016. Under the cash method, you would report that income in 2017 – when you received it. This is true even if you don’t cash a check you’ve received right away.
There is one exception:
If you pay an expense in advance, such as an insurance premium, you can deduct that expense only in the tax year that it covers.
For example:
You pay $1,200 for a one-year business insurance policy that goes into effect on December 1, 2016. You can deduct only December’s portion of the coverage in 2016.
You would deduct $100 in 2016 ($1,200 divided by 12 and multiplied by 1 month) and the remaining $1,100 in 2017.
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