I just started a business. What does it mean that I have to pick an "accounting year" and "accounting method?"
May 30, 2007
This is often confusing for folks who are just starting a business. The IRS website helps explain the different options available:
"All taxpayers - including small businesses - must report income and expenses on an annual basis.
"The most common accounting period is the calendar year - January 1 through December 31.
The other option is a fiscal year which is 12 consecutive months ending on the last day of any month except December - for example July 1 through June 30.
"An accounting method must also be established and generally does not change.
The most common is the cash method where you report income in the tax year you receive it and deduct expenses in the tax year you pay them.
"Another option is the accrual method where you report income in the tax year you earn it, and deduct expenses in the tax year you incur them, regardless of when payment is made.
"Related Links:
Recordkeeping
Publication 538, Accounting Periods and Methods
Tax Years "
I usually suggest that most small business owners use a cash accounting method and a calendar year because these are the same method and year that are usually used for personal income tax returns.
