Some people view the IRS as a blood-sucking ogre intent on harassing businesses. Perhaps that’s the reason why the saying, “if something can be taxed, it is taxed” rings true for so many business owners and managers. Even in a relatively small business with just a few employees, one accountant can keep busy filing all the tax returns and forms that are required. While the federal income tax is the 500-pound gorilla, there are many other types of taxes are imposed on business. Businesses that are employers pay taxes on their payroll, including Social Security, Medicare, and unemployment taxes. Some states levy a tax on inventory (goods being manufactured and products being held for sale). Most states and local jurisdictions tax the real estate owned by the business. International trading has its own type of taxes, for which a business acts as a collection agent for the taxing authority. Furthermore, a business has license fees to pay, and some companies have to pay franchise fees. When it comes to the IRS, they actually have quite reasonable guidelines regarding business accounting methods for determining annual taxable income. For instance, businesses with annual sales revenue of more than $5 million are required to use accrual-basis accounting methods for revenue and expenses. One main exception: Personal service corporations (in which 95 percent or more of revenue is from rendering personal services) may elect to use cash accounting. Also, farmers can use cash-basis accounting. Smaller businesses (less than $5 million annuals sales revenue) can elect to use cash accounting — except for those businesses that produce, purchase, and sell merchandise. They must use accrual accounting for inventory, cost of goods sold, and sales revenue; they can use the cash basis for other income and expenses. So they may use a hybrid accounting system that includes elements of both cash and accrual accounting. Just as important is the IRS’ insistence on maintaining the same accounting method. The IRS stresses consistency of accounting methods year to year, which is a fundamental pillar of accounting theory and standards. Changes in accounting methods from one year to the next are anathema — to be avoided unless absolutely necessary. The IRS does allow changes in accounting methods, but a business has to jump through hoops to do it. See IRS Publication 538 Accounting Periods and Methods for more details. To download this publication, go to http://www.irs.gov and navigate to forms and publications for businesses. The accounting department is responsible for making sure that the correct accounting method is adopted according to IRS rules. As you may already know, failure to pay the proper amounts of taxes or filing tax returns after their deadlines can result in heavy fines and penalties. Follow IRS guidelines consistently and you won’t have anything to worry about. For more information on how the Onisko & Scholz team can help you comply with IRS accounting method rules contact us today. Or call 562-420-3100.