switching to accrual
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New Member

switching to accrual

I am a mental health cnslr, single member LLC. For years I have used cash method. I was burned badly when a company I had a contract with went bankrupt. I had many unpaid invoices. I stopped my business for about 3-4 years but since retiring from a full time job, I have restarted it as telemental health. With third party payers who pay unpredictably I have to wait on at least 75% of my fee and if they won't pay then the client has to pay. With this lag time it puts me at more risk of the client not paying. Some insurance companies only pay the client (not directly to me) so generally if the client is responsible they will pay me but i also do substance abuse clients who are not as responsible. Should I switch to accrual and how do I do that with the IRS


2 Replies
Employee Tax Expert

switching to accrual

If you don't have a compelling reason to use the accrual method, you are better served sticking with cash-basis accounting for simplicity, if for no other reason.  From a Tax perspective I don't see any benefit to switching to the accrual accounting method. 


The difference between cash and accrual accounting lies in the timing of when sales and purchases are recorded in your accountsCash accounting recognizes revenue and expenses only when money changes hands, but accrual accounting recognizes revenue when it's earned, and expenses when they're billed (but not paid).


Accrual Basis
This basis of accounting means that income and expenses are recognized when they accrue.  Income is reported when the work is completed.  Expenses are reported when the company receives goods or services. Both are reported regardless of money ever changing hands.  Under this basis, a taxpayer could pay taxes on money never received.

Cash Basis
Cash basis reporting means that you report your income and expenses when they are received and paid respectively.  Income is reported once the cash is received from the customer.  Expenses are reported when paid (via check, credit card, or cash).  Most small businesses report under the cash basis reporting method.  There are some businesses that either choose to report or are required to report under the accrual method.



Level 10

switching to accrual

If you switch to the accrual method of accounting you will be required to pick up the income, pay the tax and wait on the cash.  This makes no sense.

At least with the cash method of accounting you only pick up the income and pay the tax when you receive the cash.

*A reminder that posts in a forum such as this do not constitute tax advice.*
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