Tax Year and Cash or Accrual Accounting

• Author: Lionel S. Sobel
• Pages: 109-113

109

CHAPTER 4

Tax Year and Cash or

Accrual Accounting

Tax Year

Cash or Accrual Accounting

Cash Receipts and Disbursements Method

Accrual Method

In Chapter 2, we looked at what constitutes “income,” but not at the

difference between “receiving” income and “earning” it, nor at when

taxpayers must report their income on their income tax returns. In

Chapter 3, we looked at what types of expenses are deductible and at

when expenses may be deducted by taxpayers who “paid or incurred”

them, but we didn’t examine what the difference is between “paying”

an expense and “incurring” one.

This chapter briefly deals with these issues. They will be impor-

tant when we get to Loan-Out Corporations in Chapter 8 and to

Deferred and Contingent Compensation in Chapter 9.

Tax Year

You know—probably from personal experience—that taxes are com-

puted, and income tax returns filed, once a year. Birthdays are mea-

sured from birth dates, so a baby born on July 4 of year one becomes

one year old on July 4 of year two. But people don’t file their annual tax

returns on their birthdays, and corporations don’t file their annual

tax returns on the anniversary of their dates of incorporation. Where

taxes are concerned, the Internal Revenue Code specifies the dates on

which tax years begin and end. There are two kinds of taxable years:

calendar years and fiscal years. Calendar years begin on January 1

and end on December 31.1 Fiscal years begin on the first day of any

1. I.R.C. §441(d).

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