Question

Charlie's Green Lawn Cares is a cash basis taxpayer. Charlie Adame, the sole proprietor, is considering delaying some of his December 2019 customer billings for lawn care into the next year. In addition, he is thinking about paying of the bills in late December 2019, which he would ordinarily pay in January 2020. This way, Charlie claims, he will have "less income and more expenses, thereby paying less tax!" Is Charlie's way of thinking acceptable?

Answer 1

Charlie's green lawn cares is correct.

Entries are made either on cash basis or accrual basis.

In cash basis,expenses are recorded when they are actually paid and income is entered when actually received.

but in accrual system ,revenue is recorded when it is generated if there is an expected future economic benefit.And record expense as they become due,not when they are paid. Accrual basis records all receivable and payable as asset and liability respectively. So the actual income will be different from book profit.

Since Charlie's green lawn cares is a cash basis tax payer,he can take advantage of late receipt of income and early payment of expense to invade tax.