Hi Triptych,
Taxes are so confusing, aren't they?
Heavens. That's because for all the rules, there are exceptions.
You would fall under a special category that lets you use a
combination of both cash and accrual.
You'll check off the cash basis box on your tax return.
But you'll need to keep track of your inventories on an
accrual basis.
http://www.irs.gov/publications/p334/ch02.html#d0e2252
So, for everything you do, with respect to your operations,
you won't need to accrue anything.
However, when it comes to your inventory - at the end of
the year, you'll need to determine its value - and deduct
the ending balance of your inventory from cost of goods sold
(page 2 of the Schedule C).
That's essentially your primary concession to the accrual method.
If you have further questions about this - please let me know.
I suspect you will want some clarification. It's not such a
clear area to understand.
Best wishes with your business.
Your TaxMama-ga |
Request for Answer Clarification by
triptych-ga
on
04 Aug 2004 17:06 PDT
My business is buying used "stuff," usually from live bankruptcy
auctions, and reselling that stuff on ebay. AS far as NAICS codes,
doesn't that mean my business is "retail trade" and therefore I don't
qualify for the exception?
|
Clarification of Answer by
taxmama-ga
on
05 Aug 2004 13:03 PDT
Hi Triptych,
Thanks for the kind words - and your generosity on the other question.
You asked:
My business is buying used "stuff," usually from live bankruptcy
auctions, and reselling that stuff on ebay. AS far as NAICS codes,
doesn't that mean my business is "retail trade" and therefore I don't
qualify for the exception?
You would think that would be the case, wouldn't you?
But, no, you're not locked in - this is what IRS says:
INVENTORIES
Generally, if you produce, purchase or sell merchandise in your business,
you must keep an inventory and use the accrual method for purchases and
sales of merchandise.
However, the following taxpayers can use the cash method of accounting
even if they produce, purchase, or sell merchandise. These taxpayers
can also account for inventoriable items as materials and supplies
that are not incidental.
This is how you qualify to get away with the combination method:
Qualifying taxpayer. You are a qualifying taxpayer if:
Your average annual gross receipts for each prior tax year ending on or
after December 17, 1998, is $1 million or less. (Your average annual
gross receipts for a tax year is figured by adding the gross receipts
for that tax year and the 2 preceding tax years and dividing by 3.)
AND
Your business is not a tax shelter, as defined under section 448(d)(3)
of the Internal Revenue Code.
I suspect you qualify.
SO - the choice is up to you.
If you feel more comfortable using the accrual method for
your whole business, you may.
That will mean entering all your accounts receivable and
picking them up in income before you've been paid.
However, it also means entering all your accounts payable
on the books and deducting those costs before you pay them.
On the other hand, you are free to use the combined method:
Accrual Basis for your inventories and cost of goods sold.
(This will simply involve a journal entry at the end of the year.)
Cash Basis for the rest of your business.
Don't you hate having so many options?
It's sometimes easier just having no choice, isn't it?
So the decision is yours. Your tax pro can help you decide
which way you'll come out better in the long run.
Best wishes
Your TaxMama-ga
|
Request for Answer Clarification by
triptych-ga
on
09 Aug 2004 20:05 PDT
OK, I was confused here I think because of the rules for the 2
different exemptions the IRS lists. One is for "qualifying taxpayers"
and the other is for "qualifying small business." Now I have a small
business, but.. I'm under 1 million in gross revenues, so I'm just a
taxpayer as far as that goes, right? And am I right that at over the 1
million gross mark I would have to go to accrual as retail NAICS codes
are specifcially exempted from the expemption? (whew!)
|
Clarification of Answer by
taxmama-ga
on
10 Aug 2004 11:25 PDT
Hi Triptych,
Don't you just love IRS jargon.
Actually, you qualify under both definitions -
as a Qualifying taxpayer AND as a Qualifying small business taxpayer.
So, per IRS's statement:
"the following taxpayers can use the cash method of accounting even
if they produce, purchase, or sell merchandise. These taxpayers can
also account for inventoriable items as materials and supplies that
are not incidental"
Now, remember, IRS says that you CAN use the cash method, not that you
MUST use it.
You are still welcome to use accrual if you prefer. But, because your
operation is small enough, you have the choice of not using the
accrual method.
Is your accountant disputing the combination option?
Best wishes
TaxMama-ga
|
Request for Answer Clarification by
triptych-ga
on
10 Aug 2004 16:23 PDT
The IRS site says:
"Qualifying small business taxpayer. You are a qualifying small
business taxpayer if:
Your average annual gross receipts for each prior tax year ending on
or after December 31, 2000, is more than $1 million but not more than
$10 million. (Your average annual gross receipts for a tax year is
figured by adding the gross receipts for that tax year and the 2
preceding tax years and dividing the total by 3.)
You are not prohibited from using the cash method under section 448 of
the Internal Revenue Code.
Your principle business activity is an eligible business (described in
Publication 538 and Revenue Procedure 2002?28).
"
Now if you look at that last part, it refers to publication 538.
So I go to 538....
And it says:
"Eligible business. An eligible business is any business for which a
qualified small business taxpayer can use the cash method and choose
to not keep an inventory. You have an eligible business if you meet
any of the following requirements.
Your principal business activity is described in a North American
Industry Classification System (NAICS) code other than any of the
following.
NAICS codes 211 and 212 (mining activities).
NAICS codes 31?33 (manufacturing).
NAICS code 42 (wholesale trade).
NAICS codes 44?45 (retail trade).
NAICS codes 5111 and 5122 (information industries).
Your principal business activity is the provision of services,
including the provision of property incident to those services.
Your principal business activity is the fabrication or modification of
tangible personal property upon demand in accordance with customer
design or specifications. "
So there it seems to be saying that "retail trade" is required to use
accrual for inventories regardless...
|
Clarification of Answer by
taxmama-ga
on
10 Aug 2004 17:18 PDT
Hi Triptych
OK, you've sold me. You're right.
You don't qualify as a qualified small business per
Revenue Procedure 2002-28 due to the fact that
your business is involved with retail or wholesale sales.
http://www.unclefed.com/Tax-Bulls/2002/rp02-28.pdf
Until you hit one million dollars in annual sales, though,
you do still qualify as a Qualifying taxpayer.
You are a qualifying taxpayer if:
Your average annual gross receipts for each prior tax year
ending on or after December 17, 1998, is $1 million or less.
(Your average annual gross receipts for a tax year is
figured by adding the gross receipts for that tax year and
the 2 preceding tax years and dividing by 3.)
Your business is not a tax shelter, as defined under
section 448(d)(3) of the Internal Revenue Code.
So if you expect to your average annual gross receipts to rise
above that level in the next year or so - you may want to set
yourself up on a full accrual basis from the outset.
However, if your average annual receipts over three years won't
reach the million-dollar level....the choice is up to you.
http://www.irs.gov/publications/p334/ch02.html#d0e2252
You're very good a reading the Internal Revenue Code.
Have you ever thought studying to be a tax professional?
Every once in a while, I run across someone who handle the
details. I've persuaded several clients or friends to learn
about taxes. A career like that gives you a certain measure
of independence. Some clients (OK, former, now), have gone
on to beome CPAs.
Thanks for digging. This has been interesting.
Best wishes
TaxMama-ga
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