Harlan Lunsford <hlunsfordns[at]bellsouth.net> wrote:

snip

- quote -

Agreed but then he is using a hybrid method, not the pure
cash method <grin> . Aren't semantics great

Drew Edmundson, CPA (NC)

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Harlan Lunsford wrote:

- quote -

Hybrid methods will be recognized if they do not "materially
misstate income" under IRC Section 446. And, as well, once
a method of accounting is adopted by a taxpayer you need IRS
approval to change *even if* the method is improper.

So now we turn to the Intuit method of accounting for
employer payroll taxes by cash basis taxpayers <grin> .
There's little question it's not in compliance with the cash
basis of accounting, since an expense is only deductible
when paid. However, almost all clients who are using
Quickbooks for payroll will find it has put them on this
"accrued payroll taxes" method of accounting and, arguably,
it doesn't materially distort income unless you have some
unusual facts.

So, in most real world cases, the agent is not going to
argue this one. But that doesn't mean it's a "valid" method
if it results in a major benefit to the taxpayer--which can
be an important item to remember if an unusual circumstance
arises.

--
Ed Zollars, CPA
Phoenix, Arizona

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Drew Edmundson wrote:
- quote -

However, if one accrues payroll taxes consistently even
though on a cash basis, this hybrid method is recognized by
IRS.

Christmas Cheer$,
Harlan Lunsford, EA n LA

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Gene E. Utterback, EA" <eagent[at]alliancetax.com> wrote:
- quote -

QB handles A/R correctly (with certain exceptions) for a
cash basis taxpayer. The client should specify they are
cash basis in the "preferences." The same holds for A/P
(with certain exceptions).

- quote -

I agree with your colleague that employer taxes are
deductible when paid.

snip

Drew Edmundson, CPA (NC)

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Gene E. Utterback, EA" <eagent[at]alliancetax.com> wrote:
- quote -

I do generate an invoice in QB for each client at the end of each
month.

- quote -

I enter only payments, not purchases. I run a very small
business. Everything is paid for when purchased, either by
credit card or bank check.

- quote -

I understand.

- quote -

Thanks. This is both interesting and very useful.

- quote -

The system is set for cash accounting. I never post unpaid
bills.

- quote -

I track work for clients on a daily basis using Excel.
Statements sent to clients are generated with Excel. I track
who owes what using Excel. The monthly totals from the Excel
statements are entered into QB as "invoices" so I can track
expenses and such using QB. The "who owes what" data is
therefore also in Excel. At the end of the year my
accountant uses my QB file to generate my tax return.

--
Vic Roberts

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"Victor Roberts" <Vic[at]Lighting-Research.com> wrote:

- quote -

Your problem lies more in how you are using the software
than anything else. Your A/Rs don't show as income likely
because you are not using QB to generate invoices. The
generation of an unpaid invoice inside any accounting
package I've ever used has resulted in an A/R entry and
income on the Income Statement.

Your A/P likely shows up because you are entering your
purchases - as opposed to your payments - in QB. The
entering of unpaid purchases usually generates A/P.

Credit card purchases are deductible when charged since you
are then obligated to pay.

The payroll liabilities are unique in that you are acting as
an agent of the government, have withheld most of the money
from your employee's wages, and are legally obligated to
remit them timely. That being said, opinions on this differ
even among educated professionals. Since the majority of
this money is Trust Fund money, I always show it as a
liability even on cash basis financials - again, because you
already have the money in hand. One accountant friend of
mine shows ONLY the trust fund portion, not accruing the
employer's contribution until actually paid. Yet another of
my colleagues refuses to post ANYTHING until it is paid.
This is one of those areas where professional judgment comes
into play. The most important caveat here is to be
consistent.

It would appear from the information you have submitted that
your system is set up to handle the accrual basis but you
are only using part of it correctly. Which part is a matter
for much debate - if you want to use the cash basis stop
posting unpaid bills, if you want to post unpaid bills then
post invoices. Whichever you choose, you should be
consistent.

The question I have for you is this - how are you tracking
who owes you what and from when? IMNHO - all internal
accounting should be done on the accrual basis so that you
can track what you are owed and what you owe in sufficient
detail to make sure you not get paid, but pay your bills on
time.

Gene E. Utterback, EA

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Victor Roberts <Vic[at]Lighting-Research.com> wrote:

- quote -

The credit card is showing up correctly. See the earlier
post titled: Cash / accrual accounting method.

The withholdings should also be on your QB cash basis
balance sheet (properly called a statement of assets,
liabilities and equity - cash basis). However QB adds the
employer match incorrectly to the cash basis statement.
This is discussed in either the QB documentation or on their
web site. It is by design so that the payroll tax liability
on the "cash basis balance sheet" equals (in theory) the
payroll reports.

I say in theory because I think matching the payroll reports
to the financial statements is one of the top five things QB
users seem to fail to do (included in this is the failure to
use the "pay liabilities feature" instead of "write a check"
when the QB user goes to pay payroll tax liabilities).

Drew Edmundson, CPA (NC)

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I own a one-person consulting business. We are organized as
a C Corp. I use QuickBooks for my corporate books. I operate
on Cash Basis accounting, as opposed to Accrual Basis.

If I am due a payment from one of my clients but that
payment has not yet arrived, this payment does not show on
my Profit & Loss sheet. This is the expected result since I
use Cash Basis accounting. However, if I owe money, for
example to the government for a payroll tax liability that
is not yet due, or to my credit card company or to me, for
some expense I have incurred for the company but have not
yet been reimbursed for, these liabilities ARE included on
the Profit & Loss sheet in QuickBooks and reduce my net
profit.

Is this a quirk of QuickBooks or is this required by tax
law? It would seem that under Cash Basis my net profit
should not be decreased by liabilities owed by not yet due
and paid. I understand this is called Modified Cash Basis
accounting, but still would like to know if I must show
these liabilities against my net profit for the year, or if
this is just the way that QuickBooks has decided to do Cash
Basis accounting.

Thanks.

--
Vic Roberts

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