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I have a simple question that I know should be asked to an accountant but I can never get ahold of mine. I know, I know…..I should change accountants, and I will sometime soon, but it is such a hassle to start everything over with a new accountant. But I’m going to soon. In the meantime I was wondering if any of you could help me with a question.
I made more money this year than I ever have before and I still have a couple of projects that aren’t finished yet. I will finish both of them before Dec. 1, 2001. I have about $90,000.00 more that will come in by that time. Of course, that is not net profit….it is gross income and I have a lot of costs to pay out of that money. Here is my question….I can probably manage to pay those costs out of money that I already have. So….I was wondering if I received the checks for that $90,000.00 but did not cash those checks until after Jan. 1, 2002, could I then legally push that income over into next year? (I probably won’t make nearly this much next year.) Or would the IRS say that I was paid the money in 2001 even though I didn’t cash the checks until 2002, and I therefore owed the tax on that money along with my other income in 2001?
If that is the case….. if I could talk the homeowners into withholding the last few payments until Jan. 1, 2002 and then got paid all at once, would that legally become 2002 income even though I paid all the costs associated with those jobs in 2001? (Both homeowners are trusted friends, but it still makes me nervous to have them controlling that money. Something unforeseeable could happen!) I am a sole proprietor using the cash method of accounting, not the accrual method. Thanks for any help.
Ray
Replies
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Yep, you need to talk to your accountant.
And most do not want to get creative 'cause it's their neck out there too.
You could probably determine some of what you would normally expense next year and do it this year to offset the added income. You could contribute the max to an IRA.
I don't know about the time factor in your case but I have had expenses on jobs in one year and then the income (draw) came in the following year. Under the cash method you get to expense as you pay it and claim it as income when you get it.
*I think your acct. will tell you that the "income" is net charged to you untile it is "accessible" to you. For it to be accessable, it must be placed in your account, AND the checks "cleared" from the banks from which they are drawn and the monies then "available" to you for use.Alos talk to your acct. about pre-paying debts or liabilities that wil be due next year, like truck ins., liability insur., utilities, etc., even warehouse or office rent .
*To be sure see your Tax Accountant. Lots of this kind of thing depends on certain details that you may not have shared here. You may not have even knowns what details mattered.So I've got an EA who does all mine and who makes time for answering questions in a way I can understand. I figure if they don't have time for me I don't have time for them and if they can't translate into my language I don't need to learn theirs.
*Acrual verses cash accounting...If you do your own...then you use cash most likely...bill them next year and collect next year but then remember next year will be a problem. I do not believe in all the monkey business myself.near the stream,aj
*You did not say if you care a cash basis or accural. If you are on a cash basis income is taxed when it "essentially available" (I forgot the IRS words). That means that even if you sit on the check for a month it is 2001 income, not 2002.
*cash basis.... is when you get to use it.... ask your customers to date the checks after the end of year..pay as much of the bills as you can BEFORE the end of the year...but as AJ says.. you have moved the problem into the next tax year... which MAY not be any problem at all, if the economy tanks.. or your volume falls off...
*Well thanks guys, for all the prompt responses. Some good thoughts from you. I will contribute as much as possible to an IRA. I had not considered pre-paying some of next years liabilities Sonny...thanks, I'll ask my accountant about that. I'm also going to ask him about a medical IRA that can be used to pay future medical bills (so I understand). And Mike....good idea about asking the clients to post date the last few checks. AJ....thanks for your idea too, good option. But one thing...I do not believe that this is "monkey business" at all. I truly doubt that I will have nearly this much income next year and will not merely be postponing my problem. And if there are LEGAL ways to defer income to pay less taxes, wouldn't we be poor businessmen not to take advantage of it? Aren't those options available for a reason? I pay what is due, but I try not to "donate" out of ignorance or laziness. FredB....I do intend to hire a different accountant. My guy is good, but I use him more for filing taxes than financial management. And he never offers any advise....I have to specifically ask him a question before he will offer advise. I want to find someone who will be more available year-round and advise me in money management. I just have been soooooooo busy. Not a good excuse, I know. Like Elvis used to say, TCOB (Take care of business).Ray
*Ray,I think the doctrine that refers to when the money is available is callled "constructive receipt". Checks or checkable deposits, are a form of cash ( the largest form of "cash" available to the economy.) Once the check is written and delivered to you it is available for depost, so the monkey business would only be allowed for a few days in the case of an audit. As others have said, this type of thing carries forward to the next year and is not a good long term proposition.
*Remember, tax evasion is illegal. Tax avoidance is the duty of every red-blooded American. There is absolutely nothing wrong with structuring your business practice to pay the least amount of taxes (or pay them later rather than sooner) permitted by law.SHG
*Pay later is rediculous. I value my time playing with money as a total waste of a precious life. I value building a home...a tennis court...a boat...seeing the sunsets...the sunrises in Key West...Ray...I am not really calling your situation and plan monkey business in your case since you say next year will not be screwed up by your actions. If you were to be making as much next year, I would say, for me, no way! Anything that takes little effort is fine by me...But no way am I gonna stay up nights listening to tax deferrment schemes. Good luck..sounds like you understand your situation well. Make sure you do it in coordination with your accountant.near the stream,aj
*Get ready to pay a stiffer quarterly. Maxing out your IRA contribution is one way to lower your tax due. Trouble with this scenario is you still gotta come up with a way bigger cash payout come April 15. Success sure is fleeting. Best of luck.
*Ray T, run to a good tax accountant fast!The time to plan for taxes is already late, but not too late. Operating as a sole proprietor is probably costing you a lot more money than you know. And the liability exposure is ridiculous. Find a good cpa and get some financial advice.blue
*While you're at it, ask your accountant about income averaging. As I recall, there is a provision in the tax law that addresses unusual and drastic swings in your income.
*Keith:Unfortunetly, income averaging was done away with by the IRS quite a few years ago. It was a unique provision that allowed you reduce your taxes if you had an unusually high income in one or more years compared with you previous 5 years. This provision went away in the 80's, I think.
*Too many lottery winners!Rich Beckman
*Ken:Income averaging is only available if you are a farmer.
*Wow, you can't income average anymore? I thought of a 1040x right away.I guess I am old now...
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I have a simple question that I know should be asked to an accountant but I can never get ahold of mine. I know, I know.....I should change accountants, and I will sometime soon, but it is such a hassle to start everything over with a new accountant. But I'm going to soon. In the meantime I was wondering if any of you could help me with a question.
I made more money this year than I ever have before and I still have a couple of projects that aren't finished yet. I will finish both of them before Dec. 1, 2001. I have about $90,000.00 more that will come in by that time. Of course, that is not net profit....it is gross income and I have a lot of costs to pay out of that money. Here is my question....I can probably manage to pay those costs out of money that I already have. So....I was wondering if I received the checks for that $90,000.00 but did not cash those checks until after Jan. 1, 2002, could I then legally push that income over into next year? (I probably won't make nearly this much next year.) Or would the IRS say that I was paid the money in 2001 even though I didn't cash the checks until 2002, and I therefore owed the tax on that money along with my other income in 2001?
If that is the case..... if I could talk the homeowners into withholding the last few payments until Jan. 1, 2002 and then got paid all at once, would that legally become 2002 income even though I paid all the costs associated with those jobs in 2001? (Both homeowners are trusted friends, but it still makes me nervous to have them controlling that money. Something unforeseeable could happen!) I am a sole proprietor using the cash method of accounting, not the accrual method. Thanks for any help.
Ray