CRM ARTICLE
Exploring the Cash-Basis Method: Simplifying Your Tax Reporting
SmallBizCRM Staff – July 12th, 2024
What a Cash-Basis Taxpayer Is & How Cash-Basis Accounting Works
A cash-basis taxpayer is an individual or tax-paying entity that accounts for their business activities using the cash-basis method of accounting. In this method, income is recorded when payment is received, and expenses are recorded when payments are made. When noncash payments are accepted as income, the amount recorded is the fair market value (FMV) of the property received. Payments made with a bank credit card are deductible as cash payments, whereas payments made with a store credit card are treated as an account payable and not deductible until the cash is paid to the store.
How Cash-Basis Accounting Works
Under the cash-basis method, income is recognized when payment is received, and expenses are recognized when paid. This contrasts with the accrual method, where income is recorded when it is earned, and expenses are recorded when they are incurred.
When Should Income Be Considered Received?
Cash-basis income is considered received once it is available in a location over which you have ownership. For instance, if a customer pays an invoice electronically and you can move or control the funds, the income is considered received. This concept is known as constructive receipt, a fundamental principle of cash-basis accounting. Funds constructively received should be included in income in the year they become accessible, along with actual receipts of income.
Who Can Use the Cash-Basis Method of Accounting?
Most taxpayers can use the cash-basis method of accounting, except for:
- C Corporations (C-corps) with over $30 million in gross receipts over the prior three years beginning in 2024.
- Partnerships with at least one C-corp as a partner.
- Taxpayers accounting for inventory, as the accrual method is generally required.
However, partnerships with a C-corp as a partner may still be eligible to use the cash-basis method if the corporate partner is considered a small business taxpayer. A small business taxpayer has an average of $30 million or less in gross receipts over the previous three years beginning in 2024. The IRS adjusts the $30 million threshold annually for economic changes.
Businesses that are exempt from using the cash basis method for inventory accounting may still use the cash-basis method for other income and expense items. Additionally, entities required to use the accrual method for inventory may still be permitted to use the cash-basis method for all other income and expense items if they meet the criteria for a small business taxpayer.
Is Cash-Basis the Best Method of Accounting?
The cash-basis method of accounting is one of the simplest methods available. However, it is generally considered less precise for determining income and expenses compared to the accrual method. Many taxpayers favor the cash method because it aligns the recognition of taxable income with the actual receipt of cash, making it easier to manage tax payments.
Bottom Line
A cash-method taxpayer reports income when it is constructively received and expenses when they are paid. Most taxpayers who are eligible for the cash-basis method opt for it due to its simplicity. However, some taxpayers are prohibited from using this method unless they qualify for the small business taxpayer exemption. This exemption allows for a substantial amount of gross receipts, enabling many businesses that would otherwise need to use the accrual method to still qualify as cash-method taxpayers.
a cash-basis taxpayer can benefit from implementing a CRM. Here’s how and why Capsule and Less Annoying CRM could be suitable options:
Benefits of CRM for a Cash-Basis Taxpayer
- Improved Client Management: CRMs help manage client information, interactions, and history in one place. This organization can enhance client relationships and improve customer service.
- Streamlined Invoicing and Payments: CRMs can integrate with invoicing and payment systems, making it easier to track cash flow, manage outstanding invoices, and ensure timely payments.
- Enhanced Data Accuracy: By centralizing customer data, CRMs reduce the likelihood of errors and inconsistencies, leading to more accurate financial records.
- Better Reporting and Insights: CRMs provide valuable insights through reports and analytics, helping users understand client behavior, sales trends, and revenue patterns, which is crucial for tax planning and financial decision-making.
- Time Efficiency: Automating routine tasks such as follow-ups, reminders, and communication can save time, allowing the taxpayer to focus on more strategic activities.
Ever Considered Implementing a CRM?
A cash-basis taxpayer can benefit from implementing a CRM. Here’s how and why Capsule and Less Annoying CRM could be suitable options:
Benefits of CRM for a Cash-Basis Taxpayer
- Improved Client Management: CRMs help manage client information, interactions, and history in one place. This organization can enhance client relationships and improve customer service.
- Streamlined Invoicing and Payments: CRMs can integrate with invoicing and payment systems, making it easier to track cash flow, manage outstanding invoices, and ensure timely payments.
- Enhanced Data Accuracy: By centralizing customer data, CRMs reduce the likelihood of errors and inconsistencies, leading to more accurate financial records.
- Better Reporting and Insights: CRMs provide valuable insights through reports and analytics, helping users understand client behavior, sales trends, and revenue patterns, which is crucial for tax planning and financial decision-making.
- Time Efficiency: Automating routine tasks such as follow-ups, reminders, and communication can save time, allowing the taxpayer to focus on more strategic activities.
Suitability of Capsule and Less Annoying CRM
Capsule CRM:
- User-Friendly Interface: Capsule is known for its intuitive and user-friendly interface, making it easy to manage contacts, sales, and tasks.
- Customization: Offers customizable features to tailor the CRM to specific business needs, including custom fields and tags.
- Integration Capabilities: Integrates with various accounting software, email systems, and other business tools, which can streamline the workflow for a cash-basis taxpayer.
- Affordable Pricing: Provides a cost-effective solution with different pricing plans to suit varying needs and budgets.
Less Annoying CRM:
- Simplicity and Ease of Use: As the name suggests, Less Annoying CRM is designed to be straightforward to use, which is ideal for small businesses and those new to CRM systems.
- Affordability: Offers a single, low-cost pricing plan with all features included, making it accessible for small businesses and individual taxpayers.
- Focus on Core Features: Concentrates on essential CRM functionalities like contact management, calendar integration, and task tracking without overwhelming users with unnecessary features.
- Excellent Customer Support: Known for its responsive customer support, which can be beneficial for users who may need assistance during the implementation and usage phases.
Conclusion
Implementing a CRM can significantly benefit a cash-basis taxpayer by improving client management, streamlining invoicing and payments, enhancing data accuracy, providing valuable insights, and saving time. Both Capsule and Less Annoying CRM are suitable options due to their user-friendly interfaces, affordability, and relevant features tailored to the needs of small businesses and individual users.