 Income tax 2023-2024, accounting periods, get ready and some coffee so we can lessen the sting from the IRS smack with income tax preparation 2023-2024. Most of this information can be found in Publication 334, tax guide for small business for individuals who use Schedule C, tax year 2023, which you can find on the IRS website at irs.gov, irs.gov, looking at the income tax formula. Remember in the first half of the income tax formula, basically a funny income statement, most income statements having income minus expenses resulting in net income. Here having income minus various deductions resulting in taxable income, the Schedule C from the sole proprietorship ultimately rolling into line one income, which is kind of strange because the Schedule C itself is basically an income statement having business income minus business expenses, basically business deductions that is equals in essence the net business income, which rolls into line one income of the income tax formula, which is outlining the calculation on the form 1040. This being the first page of the form 1040, the Schedule C ultimately rolling into line eight additional income from Schedule 1. Here is the Schedule 1 additional income and adjustments to income part number one where the Schedule C rolls into line three business income or loss from the Schedule C. Here is a Schedule C profit or loss from business. First, a word from our sponsor. Yeah, actually, we're sponsoring ourselves on this one, because apparently the merchandisers, they don't want to be seen with us. But that's okay, whatever, because our merchandise is better than their stupid stuff anyways. Like our trust me, I'm an accountant product line. Yeah, it's paramount that you let people know that you're an accountant, because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions. Looking at the accounting periods, which are as regular as the minstrel cycle and as irritating, we've got the accounting periods and methods introduction. So you must figure your taxable income and file an income tax return for an annual accounting period called a tax year. Note that when we think about the tax year, you're probably thinking calendar year, January through December, and for most sole proprietors that will be typically the year used. However, you can imagine situations where you can have the tax year and try to get it different than the calendar year. If you were able to use some other tax system or some other year, other than the calendar year, you would still have to have it having an annual calculation, meaning 12 months in the year, of course. You can't have like one year that's got 11 months and the next year have like 13 months or something strange like that. Also, you must consistently use an accounting method that clearly shows your income and expenses for the tax year. We'll talk more about methods later, the primary two methods that would come to mind or more on the bookkeeping side of things. That being a cash-based method and a cruel-based method, noting that in actuality, we're usually using some kind of hybrid method. In other words, for taxes, oftentimes we have a cash-based method, but you can think of many areas where the IRS, the tax code will force you to do an accrual thing, such as when you have property plants and equipment and can't expense it, even if you paid cash for it, but rather putting it on the books as an asset and depreciating it. That's an accrual type of activity deviating from a cash-based system. We'll talk about the methods a little bit more in future presentations. Useful items, publications that could be useful for this area. You've got five, three, eight accounting periods and methods. You can find that on the IRS website, of course. Accounting periods. When preparing a statement of income and expenses, generally your income tax return, you must use your books and records for a specific interval of time, called the accounting period. The annual accounting period for your business tax return is called a tax year. These terms sound similar, but they do have some distinctions. Most of the time, they will basically be the same. You've got a tax year. You've got a calendar year. You've got the accounting period with regards to taxes basically being a year, which is usually going to be the calendar year. You can use one of the following tax years. You've got a calendar year tax year, and then you've got a fiscal tax year. So you might have a fiscal tax year of something different than the normal calendar year. Again, that being a little bit unusual when you talk about a Schedule C type of business, possibly something you're more likely to see in other types of entities such as S corporations or possibly C corporations, but there it is. Now note that as we get into things like accounting periods and methods, we're diving into basically bookkeeping terminology, remembering that the double entry accounting system is basically a universal type of accounting system. But when we think about different methods, we can think of like a cash-based method. We can think of an accrual-based method. And we have to determine what are the regulatory authorities that we're trying to conform to in order to create our financial statements with regards to small businesses. If they're basically building their books just to do their tax return, then the people that we're trying to tailor our financials to is the tax code, right? So obviously the tax code is the thing that's going to help us to determine whether or not we have an appropriate accounting method that we will be using. I say that because that's different than what you might think of in publicly traded companies. If it was an audited publicly traded company, then they have to adhere to the rules of say generally accepted accounting principles, for example, which would be more on an accrual side of things and have very specific rules with regards to that basis. If you needed the financial statements to get a loan from the bank, for example, then the bank might have certain requirements. They would be more likely, you would think, to want an accrual type of system because that's often considered a more accurate type of system oftentimes. But in some cases they might be happy with just your tax return. Also note that as we get into the bookkeeping side of things, we note that the taxes really don't have the full set of books because we don't have the full set of financial statements. We don't have generally the balance sheet and income statement. What we have is just the income statement, the schedule C, which is the performance statement because we're doing an income tax return, which is saying how much we earned over the year and how much expenses we needed to expend in order to earn it. If you do your bookkeeping using software like a QuickBooks or some related software, you will also have a balance sheet, which is something worth keeping track of because the balance sheet is the double entry accounting system helping to make sure that your income statement accounts, income and expenses are reported properly or given you at least help with that in the proper time period. Okay, so unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. So when you file your first tax return, it becomes quite important to make sure that you double check these things, such as number one, what's your accounting period? Usually it's going to be a calendar year, but make sure that's what you want. If there's something other than that that you want after filing the first tax return, it's going to be difficult because one of the major accounting principles that will also be reflected in the tax code is consistency. One way to manipulate the books, one way to try to manipulate the taxes you would be paying is to manipulate the cutoff dates, meaning try to have income that will be before or after the cutoff date. Try to have expenses before or after the cutoff date. One way people could easily manipulate that is if they change their accounting periods. Like, yeah, I have a December year end this year, but next year it's going to be a January year end, and so on and so forth, and you can constantly play games with what period the revenue is going to be recognized in. So obviously the tax code is going to be set up like a good accounting system, which would see, no, we need consistency. The accounting period has to be the same. Doesn't mean that possibly you can't change it under any circumstances, but it will be more difficult to change after the first year. The same goes for the method that you're going to use that we'll talk more about later. It's going to be, if you choose a cash-based method, then that's the method that you're going to, that the IRS is going to be wanting you to stick with unless there's a reason to change it given the consistency principle. Okay, so a required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. So remember, we're not looking at generally accepted accounting principles here and whatnot, we're talking tax code. And that means that you might have, in certain instances, situations where your bookkeeping is different than the taxes, right? Because you might have your bookkeeping set in accordance with some other regulations, such as generally accepted accounting principles or more of a basis that would be necessary for the bank or external investors. And it might be slightly different with regards to taxes because the tax code is the thing that you're in compliance with with regards to the tax return, which again could get into situations where you have a little bit of complex accounting that you need to do at your end to adjust your books from whatever basis it is on to comply with the tax basis. Okay, so calendar tax year. A calendar tax year is 12 consecutive months beginning January 1st and ending December 31st are far the most common year that will be adopted for sole proprietor type of businesses reporting on a schedule C, the calendar year, January to December. You must adopt the calendar year if any of the following apply. You do not keep books. So if you don't have books being kept, then you're going to default to the calendar year. You have no annual accounting period. So your present tax year does not qualify as a fiscal year. So you have some fiscal year, but the IRS is like, no, that doesn't qualify there for your defaulting to the calendar year. Your use of the calendar tax year is required under the internal revenue code or the income tax regulations. If you file your first income tax return using the calendar year and you later begin business as a sole proprietor, you must continue to use the calendar tax year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval. So that's the consistency principle. You've made your choice. You filed your tax return. We're on the same page at this point in time. You can't just be changing the periods and the calendar year to some other fiscal year unless you get approval or there's some specific rationale for doing so in the tax code. For more information, you can see change in tax year later. So if you adopt the calendar tax year, you must maintain your books and records and report your income expenses for the period from January 1st through December 31st of each year. Those are the cutoff dates that you have to be reporting basically the income for in accordance with the method that we're going to be using, which we'll talk more about later, generally being some kind of cash basis or a cruel basis or some in-between basis. So fiscal tax year. A fiscal tax year is 12 consecutive months ending on the last day of any month except December. A 52-53 week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month. So this gets a little bit technical, of course, because when we consider a year, it kind of changes in terms of the amount of days in the year, right, 365 days. There's about 52 weeks to 53 weeks in the year, so we have to be basically consistent with the number of weeks that are being in the year for choose something other than the calendar year that would be basically the same interval of time. So if you adopt a fiscal tax year, you must maintain your books and records and report your income using expenses using the same tax year. So your books should match up on how you're doing your books to what is being reported on the tax return. Otherwise, it looks like you're doing something funny just for tax reasons that doesn't line up with your books side of things. You would think that if you had a year other than the calendar year that you're doing that because you have a natural business year in in your business that doesn't coincide with the end of the year. So that would mean that you would think that your books aren't done that way as well. If your books aren't done that way, I believe the rationale of the tax code is to say, well, you must be choosing this other tax year for some weird reason that doesn't make sense. It's not the reason that we want to give the ability to do that for. So for more information on a fiscal tax year, including a 52-53 week tax year, you can see publication 538. Change in tax year. Similarly, you must file form 1128 application to adopt, change, or retain a tax year to request IRS approval to change your tax year. See the instructions for form 1128 for exceptions. So I've seen situations where people get into trouble that they filed something incorrectly or not the way they wanted to do it in the first year and then they have to go through this process of getting acceptance or approval to change something such as like with a tax year here, and that's not the position that you would like to be in because then that could take some time to do and put you in that limbo zone, stress you out, so get it right on the first tax return. So if you qualify for an automatic approval request, a user fee is not required. If you do not qualify for automatic approval, a ruling must be requested. See the instructions for form 1128 for information about user fees if you are requesting a ruling.