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There are two different ways that you could be eligible to file your taxes—on a cash or an accrual basis.
You’re going to file on a cash basis if you get paid after you provide the service(s) because that’s when you’ve earned the money. If you get paid later, you want to file on a cash basis, because you don’t want to pay taxes on money you earned, but haven’t collected yet.
The opposite is true for accrual basis. If you collect the money before you provide the services (e.g deposits or upfront payments), you should consider filing on an accrual basis because you don’t want to pay taxes on money that you’ve collected, but you haven’t earned yet.
In summary, file your taxes on a cash basis if you get paid after you earn the money or an accrual basis if you get paid before you earn the money. Make sure you work with your CPA on a regular basis to minimize your taxes to increase the profitability and safety in your business.
This post was reviewed by our team of accounting and financial experts. TGG’s mission is to make business owners’ lives better through excellent financial management. We strive to provide the most up-to-date and objective information on accounting-related topics so our readers can make informed decisions based on factual content. All posts undergo a review process with at least one member of our Leadership Team to ensure accuracy.
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Matt Garrett is the Founder and Chief Executive Officer of TGG. He is a regular speaker across the country on behalf of Vistage educating business owners on the need for sound financial practices, and is Vice President of the Board of Directors of FINACA. Under Matt’s leadership, TGG has received the following recognition: INC. 5000 top companies in the U.S. five years in a row; one of “San Diego’s Fastest Growing Companies” the past four years; and is among San Diego’s “Best Places to Work.”
