when can a cash basis taxpayer take a deduction, and when can they NOT?

Answer 1

The vast majority of taxpayers are cash basis.

A cash basis entity takes the deduction when they pay for the item. An accrual entity takes the deduction when the item is employed.

Example: let's say you are a construction company and you buy lumber to build 10 houses. If you are accrual, you deduct the cost of the lumber as it goes into the house. This is true whether you paid for the lumber all up front, or don't pay the bill for years. If you are cash basis, you deduct the lumber in the year you paid for it regardless when you used it.

If you tend to pay late for stuff (if you keep a high accounts payable), then you are better off being accrual because you write-off the stuff before you pay for it...free money (for a while). If you tend to buy stuff and hold it and only use it at a later time, then you may be better off being a cash basis entity.

By the way, the same holds true for receivables. If you are cash basis, you claim the income when the product is delivered. If you are accrual, you claim the income when the product is sold. If your customers tend to pay for stuff up front before receiving it, you may be better off being accrual because you can delay claiming the income until later. If they tend to pay after the product is delivered, then you are better off being cash.

OK?

Answer 2

i agree with taxman. its automatic deduction. may it be on cash or accrual bases.