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What is the difference between the cash and accrual method of accounting and which one should I use for my business?

The difference between the cash and accrual method of accounting is the timing of when income and expenses are reflected on the balance sheet and profit and loss statement.

Under the cash method, income is reported when cash is received from customers, and expenses are reported when cash is disbursed to vendors. Under the accrual method of accounting income is reported when invoiced or earned (not when cash is received) and expenses are reported when a purchase of goods or services is made (not when cash is paid).

To get a true picture of the financial position and results of operations of a business, you must use the accrual method. The good news is that most small businesses can elect to use the cash basis method of accounting for tax purposes if that method will result in lower taxable income and use the accrual method for financial statement purposes. – Gary Cates, CPA (retired)


When do I need to withdraw my Required Minimum Distributions (RMD)?

Individuals/retirees born before 7/1/1948 must take out required minimum distributions (RMDs) from their retirement accounts by 12/31/18.

If you turned 70 ½ in 2018, you have until 4/1/2019 to take the (Required Minimum Distributions) RMD for 2018.

The penalty for not paying before 12/31 is a 50% fine. – Sam Graciano, CPA


How long should I keep tax records? How long are you supposed to keep tax records?

The IRS generally recommends keeping copies of tax returns and supporting documents at least three years. Employment tax records should be kept at least four years after the date that the tax becomes due or paid, whichever is later.

Tax records should be kept at least seven years if a return claims a loss from worthless securities or a bad debt deduction. Copies of previously-filed tax returns are helpful in preparing current-year tax returns and making computations if a return needs to be amended. – Sherry Radmore, CPA


What is the best way to reduce my tax liability (defer income) after year-end for someone who is self-employed?

The SEP IRA (Simplified Employee Pension) plan is currently the only qualified retirement plan that allows you to set up the plan after the end of the tax year and still take a tax deduction. In fact, you have until the due date of the return, including extensions, to set up and fund the plan and still take a tax deduction for the prior year.

This is a great strategy for a sole proprietor who has no employees. A contribution of 20% of the net self-employment income can be sheltered in a SEP IRA account each year. Another great feature of a SEP IRA is that it is very simple to administer. – Gary Cates, CPA (retired)


I just started by own business. Do I need to make quarterly estimated tax payments?

If the business is profitable, the answer is usually yes. Depending on the type of entity you choose for your business, either you or the company will probably need to make quarterly estimated tax payments if the business reports income. The government will not force you to make estimated payments, however, if you don’t prepay and you owe money when you file your returns, you may get hit with underpayment penalties.

A business that files as a regular C Corporation will need to make estimated payments at the company level if it reports taxable income. All other entity structures (sole proprietorship, partnership, LLC, LLP and S Corporation) will require the owners to report their business income on their personal tax returns and make estimated payments personally. You should prepare a detailed tax projection to make sure sufficient estimated taxes are paid on time throughout the year to avoid penalties. – Gary Cates, CPA (retired)