Cash Basis Taxpayer
A cash basis taxpayer is a taxpayer who reports income and deductions in the year that they are actually paid or received. These taxpayers include: A corporation (other than an S corporation) with average annual gross receipts exceeding $25 million A partnership with a corporation (other than an S corporation) as a partner, and with the partnership having average annual gross receipts exceeding $25 million A tax shelter The following taxpayers are not prohibited from using the cash method of reporting: Any corporation According to the Internal Revenue Service (IRS), income is constructively received when an amount is credited to the taxpayer’s account or made available to them without restriction, regardless of whether s/he has possession of the funds. For instance, if an agent is authorized to receive income on behalf of a taxpaying entity, the taxpayer is considered to have received the money when the agent receives it. A cash basis taxpayer is a taxpayer who reports income and deductions in the year that they are actually paid or received. A cash basis taxpayer reports income and deductions in the year that they are actually paid or received.
What Is a Cash Basis Taxpayer?
A cash basis taxpayer is a taxpayer who reports income and deductions in the year that they are actually paid or received. Cash basis taxpayers cannot report receivables as income, nor deduct promissory notes as payments.
Understanding Cash Basis Taxpayer
All individual and business taxpayers are required to pay taxes on their income every year. A consistent accounting method must be used to report income and taxes for any given tax year. The two accounting methods used by taxpayers in reporting income are the accrual method and the cash method. Taxpayers who use the accrual method must report income in the year it is earned, not received. Likewise, expenses must be deducted in the year they are incurred, not paid off or settled.
A cash basis taxpayer, on the other hand, reports income in the year it is received, regardless of when it was actually earned. Basically, all items of income that are actually or constructively received during the tax year are included in the taxpayer’s gross income. If the taxpayer receives property and services, s/he must include the fair market value (FMV) in income. According to the Internal Revenue Service (IRS), income is constructively received when an amount is credited to the taxpayer’s account or made available to them without restriction, regardless of whether s/he has possession of the funds. For instance, if an agent is authorized to receive income on behalf of a taxpaying entity, the taxpayer is considered to have received the money when the agent receives it. Also, an employee who received a paycheck at the end of one year must report it as income that year, even if they didn't actually deposit the check until the following year.
A cash basis taxpayer deducts expenses in the year they are paid off, which is not necessarily the year they were incurred. However, expenses paid in advance may not be deducted; instead, the IRS allows the taxpayer to capitalize certain costs. Expenses paid in advance are deductible only in the year to which they apply, unless the expenses qualify for the 12-month rule, under which a taxpayer is not required to capitalize amounts paid to create certain rights or benefits for the taxpayer.
Although taxpayers can choose any tax reporting method at their discretion, there are some entities prohibited from using the cash basis method. These taxpayers include:
The following taxpayers are not prohibited from using the cash method of reporting:
Related terms:
Accrual Accounting
Accrual accounting is an accounting method that measures the performance of a company by recognizing economic events regardless of when the cash transaction occurs. read more
Capitalized Cost
A capitalized cost is an expense that is added to the cost basis of a fixed asset on a company's balance sheet. read more
Cash Accounting & Example
Cash accounting is a bookkeeping method where revenues and expenses are recorded when actually received or paid, and not when they were incurred. read more
Cash Basis
Cash basis is a major accounting method by which revenues and expenses are only acknowledged when the payment occurs. Cash basis accounting is less accurate than accrual accounting in the short term. read more
Cash Cost
Cash cost is a term used in cash basis accounting (as opposed to accrual basis) that refers to the recognition of costs as they are paid in cash. read more
Constructive Receipt
Constructive receipt is when cash has not been physically received, but the individual or business can still control or utilize the money. read more
Deferred Charge
A deferred charge is a prepaid expense for an underlying asset that will not be fully consumed until future periods are complete. read more
Estate
An estate is the collective sum of an individual's net worth, including all property, possessions, and other assets. Discover more about estates here. read more
Fair Market Value (FMV)
Fair market value is the price of an asset when both buyer and seller have reasonable knowledge of the asset and are willing and not pressured to trade. read more
Federal Income Tax
In the U.S., the federal income tax is the tax levied by the IRS on the annual earnings of individuals, corporations, trusts, and other legal entities. read more