Basis is a term used in computing gains and losses on the disposition of an asset. For any business owner or individual taxpayer it is important to understand what the Internal Revenue Service (IRS) is really seeking. What is your tax basis in an asset?
The Internal Revenue Service advocates two basic forms of accounting for tax purposes. The first and most common is cash basis whereby traditional financial statements are converted to cash basis for tax reporting. The second and less common is accrual basis of tax reporting. This is a required format for larger corporations. Some industries are allowed what is referred to as Modified Tax Reporting, but this generally is not allowed in small business.
Accounting’s primary purpose is to measure economic activity. There are several different methods to determine the economic value generated in your business each year. In accounting this is referred to as sets of books. There are four basic sets of accounting books. Each has a different purpose and end goal.
This is the most often asked question by all new businesses. Should I be on the cash or accrual basis of accounting for tax purposes? The common layman would always answer ‘CASH BASIS’ for tax purposes. They say this because they understand that you only pay the tax on the cash that you keep. But for us tax preparers and authorities on this subject, the answer is ‘IT DEPENDS’.