 Most of this information comes from the tax guide for small business for individuals who use Schedule C Publication 334 Tax Year 2022. You can find on the IRS website irs.gov irs.gov. Looking at the income tax formula we're focused online. One income remember in the first half of the income tax formula is in essence an income statement although just an outline just a scaffolding other forms and schedules feeding into these line items such as the Schedule C which is the small business tax form basically an income statement in and of itself having income minus expenses or business deductions the net income flowing into line one income of the income tax formula here's the first page of a form 1040 we're focused down here on line number eight where the schedule C would flow into the schedule one which would flow in here to line eight page one of the form 1040 this is a schedule C this is the profit or loss from business where we have income minus expenses or the business deductions to get to that net income in essence all right let's talk about account 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 so when we're thinking about the accounting periods we're thinking about the timeframe note that we're looking at income taxes we typically need to be looking at a year's timeframe that's going to be a 12 month time frame when we get into the methods then we talk about the two major methods or the accrual method and a cashed based method but we also ask the question could there be a hybrid between the two methods because in reality those two methods are not mirror opposites of each other or anything like that we could have accounting methods that have a bit of a cash based method and some of the accrual based method is that okay for taxes we'll talk about that more as we go also you must consistently use an accounting method that clearly shows your income and expenses for the tax year so we have to have our income reported for a year a year's timeframe and we have to have an accounting method the two primary ones accrual and cashed method that we are consistent on why is that important because if we were to shift things like our tax year we can play with the edges the borders the cutoffs to try to manipulate the taxes and if we were able to shift accounting methods from cash to accrual and back and forth for example we could once again quite easily adjust the cutoff dates by switching basically those methods and that would be not fair for taxes clearly we want to have consistency with taxes so if you choose a tax year you need to stick with that tax year as a general rule unless you're going to switch it for specific circumstances so that means you want to get everything set up properly at the start end so you don't have to change things if you pick an accounting method then generally you want to stick with that accounting method the iris may be restrictive in letting you change that accounting method even though they're giving you some leeway to pick whatever methods you want because the the main thing they want to have here is consistency consistently and thoroughly because if there's not consistency then people could manipulate things by changing accounting methods and accounting periods okay so useful items you may want to see publication 538 accounting periods and methods so if you want to dive into this in more detail you can jump into that publication on the iris website iris.gov so we have 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 an accounting period the annual accounting period for your income tax return is called a tax year so we have to have a tax year here you can use one of the following tax years a calendar tax year obviously if you are a schedule c type of business most people are probably on a calendar tax year because they're going to be reporting it uh with their form 1040 and usually that's going to be on a a normal task year or you have a fiscal tax year now you might think these two terms you know they sound quite the similar in nature and you might say for example my fiscal my fiscal year is the calendar year right so they're kind of they're basically the same in that case but you might have a situation where a fiscal year is different than the calendar year so in that situation you would be saying you know the calendar year is obviously January through December if I have a different year for taxes then I could have a different basically fiscal year that I'm doing for my business why would you do that possibly if you have a natural year that is different than the calendar year in other words sometimes you might want to end your tax year after the busiest time of the year and that would be like a natural a natural year for your business cycle even though it doesn't line up to a calendar year it also could be easier for just accounting and business purposes because if your busiest time of year for example is in December then that's not the time of the year that you want to do all this other stuff like tax preparation and all that kind of stuff you would rather be focusing in on generating revenue during that time of year and after that is over then then do your end of year kind of stuff so that's why you might have like a natural year might make sense other than a calendar year