Is taxable income from Sole Proprietorship Business the amount billed or the amount received during the tax year.

[Will30747]

Hello 

I started a Sole Proprietorship Business in the middle of 2021 with W2 income for the first quarter of 2021. I use QuickBooks to handle my books and when I run a Profit/Loss Report for 2021 it shows profit on funds that have not been collected yet or were collected in 2022. My billing is for contract time billed hourly as a IT Project Manager.

My question is do I pay Tax on what I billed in 2021 or the funds received in during 2021 only?

Thanks

[Mike9241]

if you use the cash basis of accounting (most common) you report what was received. if you use the accrual method you report what was billed.  one you choose a method you can not change it without filing some special forms with the IRS.

Quickbooks has a function, as you probably know, to switch between methods.  the method you choose also applies to expenses. so under the cash basis, you only get to deduct only what was paid during the year (except you can include expenses put on a credit card) whereas with the accrual method you also get to deduct unpaid bills for the year.

[Will30747]

Thanks that makes perfect sense, I thought I said I wanted to use "Cash"; where can I see and change to verify this is correct and if needed make a change?