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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."

5 Replies
Level 11

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.
Level 5

Business Cash v Accrued, payment received after business closed

I am winding down / closing down the business- and no further activity will happen in 2019 apart from the 1099 that will come in 2019.

 

 

 

  • Make sure you circle back with the Calif Franchise Board or the Secretary of State to close the business.
    • What do you mean, apart from letting the state of CA that the business is no longer active? and closing down the LLC? 
Highlighted
Level 20

Business Cash v Accrued, payment received after business closed


@speedway121 wrote:
What do you mean, apart from letting the state of CA that the business is no longer active? and closing down the LLC? 

File a final income tax return and a request for cancellation.

 

See https://www.ftb.ca.gov/businesses/faq/Closing_a_Business_Entity.shtml

Level 5

Business Cash v Accrued, payment received after business closed

Do I file the final tax return in 2018 or 2019? 
Business wound down in 2018 (I didnt pay CA the $800 LLC fee in2019).

1099 is coming in 2019.

 

Which year do I check the box as "final tax return" ???? 

Level 20

Business Cash v Accrued, payment received after business closed

If you are planning to wait for the 1099 that you will receive this year and report that income on your 2019 return, then 2019 will obviously be your final return and, according to the CA web site:

 

File the appropriate dissolution, surrender, or Cancelation forms with the SOS within 12 months of filing your final tax return.