Accrual Accounting Question

[Camzcl]

Hi all!

Hope you're having a lovely Monday. As tax season comes to an end I'm facing a little dilemma here.
My business sells physical products that are quite elaborate to manufacture. due to the worldwide logistics shitshow, we've had several delays delivering product to our client this year. We sell only B2B, and our invoices are paid net 60.
Now on to the tax question...
in late December one of our clients placed a PO for around 45K. In the accrual method of accounting (which we use in our business), we're liable for taxes on this invoice.
Here's the thing: We have not delivered the product as of April 11. it will still be another 2 weeks before we deliver, and only then the 60 days before getting paid will start counting.
I read somewhere that accrual accounting does take into account the actual delivery of goods, otherwise the invoices are not tax liable. In essence, your client is nor responsible for paying you because you haven't delivered, and You are not responsible for taxes since you haven't really closed the deal yet.

Has anyone encountered this issue in the past?

I highly appreciate any feedback.

Cheers!

 

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[Antifragile]

@CareCPA

 

[Ernman]

I'm thinking it's time for you to hire a tax/accounting professional.

 

[CareCPA]

Check out: https://www.irs.gov/pub/irs-pdf/p538.pdf
It lists out revenue recognition for tax-purposes, which is dependent on your method of accounting (which you say is accrual), and depending on whether or not you have "applicable financial statements."

 

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[Camzcl]

Check out: https://www.irs.gov/pub/irs-pdf/p538.pdf
It lists out revenue recognition for tax-purposes, which is dependent on your method of accounting (which you say is accrual), and depending on whether or not you have "applicable financial statements."

This is great! Thank you. And yes, we’re gonna start working with an accountant now. Time to grow up !

 

[zbones]

Lot of depends here if you're based in the US. If you're set up as C-Corp then you will need to dive into the IRS rules here. However, if you're set up as a pass through entity (S-corp, partnership, sole proprietor) and you're income is under an aggregate of $26million from the past 3 years you can file on a cash basis. Which means you recognize income and deduct expenses when you pay for them.

As as general note, taxes are accounted for differently than how you account for you business. So short answer is hire a competent tax accountant to ensure you pay your legal liability and not a penny more.