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Level 5

Business Cash v Accrued, payment received after business closed

New business owner here.

I started a LLC in CA in 2018 which costs $800 per year. 

I did not file my 2018 return yet (extension)

I performed work in 2018 for a client for $750. Did not receive the money until 2019. 

 

I have not decided if I am going to use cash or accrual method accounting for the business.

 

I had to wind down the business in 2018. I did not pay the $800 fee to CA to renew the business for 2019. 

 

I have 2 options as I see it, but dont know which is right? 

 

Option A: 

File 2018 return Schedule C for business as ACCRUAL method accounting, take into account the revenue 750.

In 2019, I will receive a 1099 for the money. Recognize the 1099 on the 2019 return and then note that the money was taxed in 2018 (and effectively zero out the income for 2019)??

 

Option B:

File 2018 return Schedule C for business as CASH method accounting, 0 revenue for 2018. 

In 2019, I will receive a 1099 for the money. Recognize the 1099 on the 2019 return.

 

Are there pro’s and con’s to either of these? option B seems like a cleaner method to follow, and it does put me at a slight disadvantage economically as I will be in a higher tax bracket in 2019."

1 Reply
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Level 9

Business Cash v Accrued, payment received after business closed

A few comments:

  • When you say "wind down" are you meaning that you are closing the business and there will be no future activity?
  • It is not common for a small business to use the accrual method of accounting.  Especially since you will most likely receive a 1099 in 2019 and the IRS will be looking to match this on your 2019 tax return.
  • I recommend you use the cash method of accounting.  The benefit here is you only pay tax on the "net" of your income and expenses.  No sense paying the tax early especially if you have not received the cash (yes in your case you do have it, but you get the point).
  • Make sure you circle back with the Calif Franchise Board or the Secretary of State to close the business.