Cash Basis Taxation

[Snaggletooth]

I had asked a question on another forum about reporting taxation for a cash basis taxpayer.

A number of extremely knowledgeable sources kept reporting principles based on accrual accounting - namely that if cash increased due to changes in a balance sheet item, then it is a wash. That I need to take Accounting 101.

I was even told that increasing cash does not affect taxable income. Even for a cash basis taxpayer.

Am I losing my mind? I thought that what "cash basis" taxation was all about.

[BOB W]

You need to give the reason for the increase in cash to get a reasonable answer. Like Loan from shareholder etc.

[Snaggletooth]

There might be a few answers. Let's say, for example, taxpayer has a bad year, but is assured of a whopping profit in the following year. Borrows $80,000 on 12/28/21, and cash increases $80K.

[TaxGuyBill]

I had asked a question on another forum about reporting taxation for a cash basis taxpayer

Without seeing the EXACT question and the EXACT comments, it is unreasonable for any of us to comment about that conversation.

Your comments are referring to taxable income, and the balance sheet ("book" income) which can be two completely different things. Again, without context, it is unreasonable for us to make definitive comments about it.

[Snaggletooth]

Bill, I understand the hesitancy due to lack of defined particulars. I will pose the same question that I posed on the other forum:

A cash basis company wishes to increase its taxation for 2021. If they borrow $100,000 from a line-of-credit on December 30th, and don't spend it, will this result in higher taxation?

[Uncle Sam]

No it won't - borrowing increases the liability section of the balance sheet - it doesn't effect profit and loss.

[Snaggletooth]

No it won't - borrowing increases the liability section of the balance sheet - it doesn't effect profit and loss.

From Uncle Sam - thank you.

Let's pose the same results in another way. Suppose the company owes $10,000 to various Accts Payable creditors that should be paid by the end of the year. Instead of paying these creditors, payment is postponed until January 2nd. So their liability section of the balance sheet is increased, much the same way as if they had borrowed the money.

If this company is a cash basis taxpayer, is their taxation increased? If not, then what effect on cash really makes any difference??

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[Uncle Sam]

Answer is the same - the mere receipt or disbursement of cash doesn't automatically constitute a change to income/expense.
In the new set of facts, all that's being effected is the liability being paid off. That doesn't effect the profit/loss.

[Snaggletooth]

Thank you again - Profit and Loss is not affected, but the question revolves around taxability if a company is paying taxes on a cash basis...

[Uncle Sam]

If the transactions you describe don't effect a profit and loss, how can they change the taxable income/loss of a cash basis entity? Tax liability would still be the same.
Anyway, how would a cash basis taxpayer have an accounts payable? Financial ratios would change, but that's not what your question pertains to.

[Snaggletooth]

I am probably not asking the right question in the right way. As stated before, I'm not having any luck on the other forum either, but I'm not sure people understand where I am going.

Fortunately, the company in question is not my client. It is a business associate who reports on an accrual basis, but pays taxes on the cash basis. Their CPA told them to maximize cash for 2021 and I have been asked to corroborate.

For the 2018 tax legislation, many companies up to $25 million in sales were permitted to change to the cash basis without seeking IRS approval. The conversion to cash negates what is payables and receivables on the accrual basis, inventories are questionable, but much more generous than prior to the legislation. Schedule L is the balance sheet for most entities, and must be presented on the accrual basis, with explanations of taxation differences disclosed on Sch M-1.

Obviously, the conversion process measures the changes in ordinary payables and receivables, but my original question centered around whether borrowing money would change taxation - not whether it would change profit/loss as measured by accrual.

If you have read this far, thank you for your patience.

[Uncle Sam]

A = L + C
You learned that in basic accounting.
If you were to receive a cash loan the bookkeeping entry
A Cash
L Liability
Even after zeroing out the receivables and payables to convert to cash, receiving an asset by simultaneously recording a liability it has -0- effect on profit/loss.

[TaxGuyBill]

Thank you again - Profit and Loss is not affected, but the question revolves around taxability if a company is paying taxes on a cash basis...

Businesses pay taxes on the profit.

Cash Basis and Accrual Basis are just different ways for timing how to calculate that profit/loss. "Cash Basis" doesn't really have anything to do with the actual amount of "cash". It just means you include the income when it is received and expenses when they are paid.

Loans are not "income" for tax purposes (when a person or business gets a car loan, house mortgage, or pays with a credit card, you obviously don't add that loan as income to the tax return). So that is why loans don't affect the taxation.

[Lion]

https://www.atxcommunity.com/topic/26937-cash-basis-reporting/

[JudyL]

https://www.atxcommunity.com/topic/2...sis-reporting/

Thank you, Rita!