When starting a business, you have to determine the method you are going to use for accounting and paying taxes. The two choices are the cash method and the accrual method.

Cash Method

I open a small business and have to order business cards and stationary. I receive the products and pay the invoice on November 18, 2007. Under the cash method, I can deduct the cost on my 2007 tax return.

Accrual Method

Using our previous example, assume I order business cards and stationary on the December 18, 2006. I receive the products on December 30th, but don’t pay the invoice until January 20, 2007. When can the expense be claimed? It depends on when economic performance occurred.

In Closing