Timing of Expenses for Tax Purposes

So I'm working on my taxes and I'm wondering about something. Nearly all of the income that I generated in December and some of November's wasn't paid until 2015 and I get that I will claim that income when I file next year.

What I'm wondering is how to handle some of the expenses associated with those shops, particularly mileage. I incurred the expense in 2014 so I assume I should claim it in 2014, right? But because in my accounting I have associated it with a particular shop that isn't paid until next year, it's making me question whether I should wait and use it to offset the income it was associated with.

Advice?

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Good question.

For the US, income is had when it is received and expenses incurred when they happened. So, for a shop done on December 20th 2014 and paid on January 20th 2015 you incurred expenses in 2014 and got income in 2015. For tax purposes don't try to match income and expenses for the same shop.

Happily shopping Rhode Island and nearby Massachusetts and Connecticut

vlade is absolutely right.

Based in MD, near DC
Shopping from the Carolinas to New York
Have video cam; will travel

Poor customer service? Don't get mad; get video.

Yeah, that's what makes the most sense to me. I just have to figure out how to keep them straight in my accounting because right now they're together.

Vlade is correct, but only for cash basis taxpayers, which nearly EVERY individual is.

There are different methods of accounting where you match expenses with income, but those tend to be used by companies that have inventory, or other things. For cash basis accounting, it's exactly what Vlade said.

I have no hands-on accounting experience but when I turn over my records to my CPA I have a column for earnings accrued in 2014 but received in 2015. This is balanced out by another column for earnings accrued in 2013 but received in 2014. Expenses are easier as they are accrued in the calendar year. I have been doing this for years with a previous business and now do it with this business.

For what it is worth.

I have always used the accrual system for my schedule C because it allows my business to claim the expenses and the income earned in the same year, even if I don't receive payment until the following year. If subsequently I never get paid, I can write it off against income in some future year when it is obvious I will never be paid. (Companies do go bankrupt leaving shoppers holding the bag.)

For me, accrual allows me to know exactly what the profitability of my business will be before the end of the year so that I can make purchases to reduce profitability or hustle end of year jobs to increase it. And by the way, your first year of doing business you need to decide whether you are a 'cash' taxpayer or an 'accrual' taxpayer where it comes to THIS business and subsequent years you need to continue with the type you selected.

I agree Flash. I am incorporated under a sub chapter S.

Your S corp is either a cash or accrual basis entity based on whatever its owner (i.e., you) are. Or it should be.

Time to build a bigger bridge.

Any expenses you paid in 2014 must be claimed on your 2014 return. If you want the shop expenses to be associated with the shop income, you can do like Flash said and elect the accrual method of accounting. I personally find the accrual method to be much easier because I already track my income.

Whichever method you use, remember that the purchase for a blown shop can be deducted even if there is no income to offset it with.

Time to build a bigger bridge.

@tracyvp wrote:

Yeah, that's what makes the most sense to me. I just have to figure out how to keep them straight in my accounting because right now they're together.

If you use spreadsheets, you can easily create another column or row and sort them differently. If you use Quicken or similar program, you can do the same. If you use paper and pencil, you have to do it again manually. What do you use?

Happily shopping Rhode Island and nearby Massachusetts and Connecticut

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Timing of Expenses for Tax Purposes

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