Per Diem Rates from the U.S. General Services Administration
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Rates are set by fiscal year, effective October 1 each year. Find current rates in the continental United States ("CONUS Rates").
Can You Use the Cash Method for Taxes and the Accrual Method for Financial Reporting?
Yes.
From a tax reporting standpoint, the cash method is more flexible because it can be used to defer the reporting of income from one tax year to the next. This is because, under the cash method, income is only reported when actually or constructively received.
A common year-end strategy for calendar year taxpayers is to send out invoices late in December to ensure payment of those invoices is not received until the following tax year, thereby deferring the reporting to that year.
However, from an internal financial reporting perspective, the cash method does not produce accurate results from period to period because it does not adhere to the matching principle, an accounting principle which states that expenses should be recognized in the same reporting period as the related revenues.
Using the accrual method for internal financial reporting purposes is a good idea for at least two reasons:
- It produces a more accurate presentation of your business's financial results, which is a prerequisite for effective financial management, and
- It complies with Generally Accepted Accounting Principles (GAAP), which financial institutions, such a s banks, prefer when evaluating the financial of a business seeking financing.
How each accounting method affects financial and tax reporting:
Under the accrual method, income is reported when earned, regardless of when actually received. Expenses are reported when incurred, regardless of when actually paid.
Under the cash method, income is reported when actually or constructively received. Expenses are reported when actually paid.
The following example demonstrates the financial and tax reporting affect of the cash and accrual methods of accounting:
- You started a document preparation service December 1, 2017.
- During December 2017 you performed services.
- You billed clients a total of $5,000 during December 2017.
- Your December expenses totaled $2,000 (i.e. wages, employment taxes, supplies,etc.)
- During January 2018 you receive $5,000 - payment for your December 2017 services.
Financial Statement Reporting - Income Statement:
- Accrual Method: Net income for December 2017, $3,000 (gross receipts $5,000 minus $2,000 expenses).
- Cash Method:
- December 2017: Net loss $2,000 ($2,000 expenses, zero gross receipts.
- January 2018: Net income $5,000 (gross receipts $5,000, zero expenses).
As you can see, income statement reporting under the accrual method is accurate.
Under the cash method, the matching principle is not adhered to, causing a distortion in the financial results of December 2017 and January 2018. December 2107 net income is understated by $5,000 and January 2018 net income is overstated by $5,000.
Tax Reporting
- Accrual method:
- Tax Year 2017: $3,000 net profit is reported on your 2017 income tax return.
- Cash method:
- Tax Year 2017: $2,000 net business loss is reported ($2,000 business expenses, zero gross receipts).
- Tax Year 2018: $5,000 net profit reported ($5,000 gross receipts. The $2,000 of expenses related to this income was reported in 2017 when they were actually paid).