Читать книгу Run Your Own Corporation - Garrett Sutton - Страница 35

You must elect a system of accounting for your business and, once selected, you need to stick to that system. The IRS does not want to play catch up in figuring out how you’re keeping your books, and to keep it simple, there are only a handful of systems allowed. The two main systems are the cash method and the accrual method. In addition, the IRS permits a hybrid method of cash and accrual, and may permit other forms of accounting allowable under IRS code. But let’s stick with the main ones.

The cash method accounts for income and outflow in real time. Income is recognized when received by the business. Expenses are considered deductible when paid. So work invoiced or billed in one financial year (i.e. December) and paid in the next (January) is not taxable the year it was invoiced but rather in the year that the money was actually received (January). Expenses coming due in one financial year and paid in the next are considered deductions in the year they were actually paid, not the year they were invoiced. So by real time we mean that income is recognized when it is really received and expenses are recognized when they are really paid.

Under the accrual method, income is recognized when it’s earned, whether or not the funds are actually received. Similarly, expenses are deductible when incurred, whether or not it takes some time to actually pay them off. So a business with a calendar (December 31st) year-end which sends out invoices in December and is paid in January is still responsible for taxes on the amount invoiced for the calendar tax year that ended in December. Again, under the cash method, taxes on the invoiced amount wouldn’t be due until the invoiced amount was actually received. So accrual is not real time receipts but rather real time billed. I prefer the certainty of receiving cash over the hope of billing for it.

Most businesses elect the cash system of accounting unless inventory is a large part of the business. No matter which method is chosen, the IRS requires business owners to make a choice and, once that choice is made, you need the IRS’s permission to change it.

In order to keep the corporate veil intact, decisions such as electing a system of accounting need to be an actual election, a vote taken or a decision made during a documented meeting of members of the LLC or shareholders of the corporation. Include such decisions in the minutes of the meeting and keep the minutes in the corporation book. Election of the professional team the business is working with, the system of accounting, opening and closing bank accounts, applying for loans and credit are all decisions that need to be recorded and maintained in the corporate minutes. Those decisions made by shareholders, members, managers or directors outside the annual meeting are made as resolutions, which need to be recorded in a written document as well and kept with the corporate meeting minutes. Decisions that need to be documented include:

• Initial election of type of business entity

• Determination of shareholder-employee or member-employee salaries

• Choice of accountant and bookkeeper

• Opening of bank accounts

• Sale of stock

• Issuing dividends

• Purchase or sale of equipment

• Purchase of real property

We will be dealing with the important topic of documentation throughout the book.