As a real estate investor, you can use either the cash basis accounting method or the accrual accounting method to recognize your business income and expenses on your tax return. While there are benefits to both methods, cash basis might warrant a second look for its tax advantages.
What’s the difference?
The accrual accounting method requires you to recognize income or expenses when they have been earned or incurred and is not dependent on the actual exchange of cash for transactions. Cash basis, however, involves recording transactions when there is an actual cash exchange. For example, you would only record income when you get paid a property rental income or when you actually receive cash for a property sale.
For many businesses, the accrual method is preferred because it provides a better representation of business and investment financial activities. However, the cash basis method is a more simple and straightforward process. It also makes it easier for your business to track cash flow position.
Managing your taxes with the cash accounting method
Using the cash basis accounting method allows you to control how much cash you recognize as income for tax purposes. You can also better specify the expenses you wish to make deductible in your tax return. This flexibility makes it a good option if you need to defer cash income for a later period or accelerate cash payments to take advantage of higher deductible benefits.
If you need to manage your taxable income within a particular tax bracket, you can choose to either pay off more expenses within the period or defer collection of until a more preferable period (for example, a period in which you do not expect to go above your planned income bracket). With this action, you can defer some business profit and reduce your tax liability for the reporting year.
Choosing a tax accounting option depends on what works best for your business and income situation. The Internal Revenue Service (IRS) recognizes the method you used to file your first tax return. However, you can choose to change this at a later time.
The James Moore advantage for tax services
The tax professionals at James Moore partner with your real estate business to find the best tax accounting strategies for you. Adopting the right ones for your business helps you take advantage of available tax benefits and incentives.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.