Question

Charlie’s Green Lawn Care is a cash basis taxpayer. Charlie Adame, the sole proprietor, is considering delaying some of his December 2018 customer billings for lawn care into the next year. In addition, he is thinking about paying some of the bills in late December 2018, which he would ordinarily pay in January 2019. This way, Charlie claims, he will have “less income and more expenses, thereby paying less tax!” Is Charlie’s way of thinking acceptable? Please explain.

Answer 1

Although GAAP requires that companies follow the Accrual Basis of accounting, it is common for companies to use the Cash Basis Of Accounting when reporting taxes. The Cash Basis Of Accounting records transactions based on when cash is paid or received.

Generally, any accountant would tend to disagree with Charlie in this case.

• This is because, although technically Charlie can try to defer some of the taxation by collecting revenue later and paying expenses earlier, he would only be creating a bigger hole in the following year since he would have more revenue and less expenses in the next year, which would translate to more income tax payable