Choosing the Optimal Accounting Method for Tax Savings

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The accounting method your business uses to report income for tax purposes, either cash or accrual, can significantly impact your tax bill. While the cash method can offer tax-saving opportunities, the accrual method may in some cases be more appropriate or even required. So review your current method to help ensure you’re using the best method for your business.

Who Can Use Cash Accounting?

The Tax Cuts and Jobs Act made the cash method more accessible to businesses than in the past and simplified the associated requirements. In 2025, a “small business” is defined as one with average annual gross receipts of $31 million or less over the prior three years. This higher threshold allows more businesses to take advantage of the cash method, along with associated benefits such as:

  • Simplified inventory accounting,
  • Exemption from the uniform capitalization rules, and
  • Exemption from the business interest deduction limitation.

Legislation has been proposed that would further increase the gross receipts threshold for eligible manufacturers. Contact the office for the latest information.

Some businesses are eligible for cash accounting even if their gross receipts exceed the threshold. This includes S corporations, partnerships without C corporation partners, farming businesses, and certain personal service corporations. But tax shelters of any size are ineligible for the cash method.

Why Does the Method Matter?

For most businesses, the cash method provides significant tax advantages. Because cash-basis businesses recognize income when received and deduct expenses when paid, they have greater control over the timing of income and deductions. For example, toward the end of the year, they can defer income by delaying invoices until the following tax year or shift deductions into the current year by accelerating payment of expenses.

In contrast, accrual-basis businesses recognize income when earned and deduct expenses when incurred, without regard to the timing of cash receipts or payments. Therefore, they have little flexibility in recognizing income or expenses for tax purposes.

The cash method also provides cash flow benefits. Because income is taxed in the year received, it helps ensure that a business has the funds needed to pay its tax bill.

However, for some businesses, the accrual method may be preferable. For instance, if a company’s accrued income tends to be lower than its accrued expenses, the accrual method may result in lower tax liability. Other potential advantages of the accrual method include the ability to deduct year-end bonuses paid within the first 2½ months of the following tax year and the option to defer taxes on certain advance payments.

Is This Change Worthwhile?

Even if your business would save taxes by changing its accounting method, be mindful of other possible consequences. For example, if your business prepares its financial statements in accordance with U.S. Generally Accepted Accounting Principles, it’s required to use the accrual method for financial reporting purposes. So, using cash accounting for tax purposes would mean keeping two sets of books, which can be burdensome.

Also, before you make a change, you’ll need consent from the IRS.

What Should You Do?

Evaluating accounting methods can be complex. Contact the office for help weighing all the relevant factors and choosing the best accounting method for your company.

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Marriage and Taxes: Key Changes After Saying ‘I Do’

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It may not be as fun to plan as the wedding venue, invitations and attire, but marriage can result in changes affecting essential tax issues that need prompt attention following the wedding.

Name

If your name has changed, report it to the Social Security Administration (SSA) so that the name on your Social Security card matches the name on your tax return. To make this change, file Form SS-5, “Application for a Social Security Card,” available from www.ssa.gov.

Tax Withholding

Both spouses must furnish their employer(s) with new Forms W-4, “Employee’s Withholding Allowance Certificate.” This is because combined incomes may move taxpayers into a different bracket. Search www.irs.gov for the IRS Withholding Calculator tool to help you complete the new Form W-4.

Filing Status

Marital status is determined as of December 31 each year. Spouses can choose to file jointly or separately each year. Contact the office and ask to have your tax liability calculated both ways.

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CA Passthrough Entity Tax: Estimate Due June 16th

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If you have a passthrough entity (Partnership, LLC, S Corporation) and would like the opportunity to make the Passthrough Entity Tax election for 2025, you have a California PTET deposit due for your entity on Monday, June 16th.

  • If your entity made the election in 2024, your PTET deposit due on June 16th is 50% of your total 2024 Passthrough Entity Tax amount. You can find this amount on Form 3893 (PTE) in your 2024 California business entity tax return: it will indicate a due date of June 16th.
  • If your entity did NOT make the election in 2024, you need to make a payment of $1,000 by June 16th for the opportunity to elect in 2025. This voucher is Form 3893 (PTE).
  • If your entity has not yet filed its 2024 tax return, but you intend to make the election for 2025, follow instructions that were provided to you with your extension documents for the amount to pay for your estimated PTET deposit by the June 16th due date.
  • Please note that making this estimated payment does not lock your entity into making the 2025 election. However, your entity will be unable to make the election if you do not make this payment.

Instructions for Making Estimated Payment

Your PTET deposit payment can be made via the Franchise Tax Board Direct Pay website. We recommend that you make the payment using this method and send your preparer the confirmation for your tax files once completed.

We also recommend making this payment ahead of time to avoid any deadline related issues with the FTB Direct Pay website. If you mail the payment, please send certified and save a copy of the certified receipt.

FTB Direct Pay:

  • California Web Pay for Business
  • Enter entity type
  • Enter entity ID
  • Enter Contact Info
  • Select Payment Type –> Passthrough Entity Elective Tax
  • Be sure to choose 1/1/25 – 12/31/25 as period beginning and end date
  • Save down payment confirmation

Mailing Address:

Franchise Tax Board
PO Box 942857
Sacramento, CA 94257-0531

If you have any additional questions that were not covered above, let us know by reaching out to your preparer or our front desk.

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Traveling With Your Spouse on Business? Know What’s Deductible

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If you own a company and travel for business, you may wonder whether you can deduct all the costs of having your spouse accompany you on trips. It’s possible, but the rules are restrictive.

When Your Spouse Is Also Your Employee

If your spouse is your employee, you may be able to deduct most of his or her travel expenses. But there are strict rules: You can deduct travel costs only if his or her presence on the trip serves a bona fide business purpose. For example, if you’re attending a trade show and your spouse is one of your company’s leading sales reps, negotiating and closing sales at the show would likely qualify as a bona fide business purpose. But it isn’t sufficient for your spouse to merely be “helpful” in incidental ways, such as by typing your meeting notes.

Similarly, a spouse’s participation in social functions, such as being a host or hostess, generally isn’t enough to establish a business purpose. That is, if his or her purpose is to develop general goodwill for customers or associates, this is usually insufficient. Further, if there’s a vacation element to the trip (for example, if your spouse spends time sightseeing), it will be more challenging to establish a business purpose for his or her presence on the trip. On the other hand, a bona fide business purpose exists if your spouse’s presence is necessary to care for your serious medical condition while you’re traveling for business.

If these tests are satisfied in relation to your spouse, you can claim the typical deductions allowed for business travel away from home. These include the costs of transportation, meals, lodging and incidentals such as dry cleaning and phone calls.

When Your Spouse Isn’t Your Employee

If your spouse isn’t your employee, then even if your spouse has a bona fide business purpose for making the trip with you, you won’t likely qualify to deduct all of his or her travel costs. But you may still be able to deduct a substantial portion of the trip’s costs. This is because the rules don’t require you to allocate 50% of your travel costs to your spouse, only any additional costs you incur for him or her.

For example, in many hotels, the cost of a single room isn’t much lower than a double. If a single room would cost you $150 a night and a double room would cost you and your spouse $200, the disallowed portion of the cost allocable to your spouse would only be $50. In other words, you can write off the cost of what you’d have paid traveling alone. To prove your deduction, ask the hotel for a room rate schedule showing single rates for the days you stay.

If you drive your car or rent one, the cost will be fully deductible even if your spouse is along. Of course, public transportation, meals and any separate expenses incurred by your spouse won’t be deductible.

What Can You Deduct?

While the employee and bona fide business purpose requirements prevent tax deductibility of a spouse’s travel costs in most cases, there are circumstances when some expenses can be deducted. Contact the office if you have questions about this or other tax-related topics.

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Your Return Is Filed! 3 Things to Keep in Mind Post-Filing

Completing tax information.

Most people feel some relief after filing their income tax returns each year. But even if you’ve successfully filed your 2024 return, you may still have questions. Here are three common ones.

1. What's the Status of Your Refund?

You can learn the status of your tax refund using an IRS online tool. Go to irs.gov and click on “Get Your Refund Status.”

You’ll need your Social Security number, filing status and refund amount.

2. What if You Forgot to Report Something?

In general, you can file an amended tax return and claim a refund within three years after you filed your original return or within two years of the date you paid the tax, whichever is later. So, if you filed your 2024 tax return on April 15, 2025 (the due date for 2024 returns), and barring any changes in the rules, you’ll generally have until April 18, 2028 (because April 15 is a Saturday and April 17 is a holiday in Washington, DC) to amend your return.

However, there are a few situations when you’re allowed more time to file an amended return. One example is claiming a bad debt deduction. Generally, you may amend your tax return to claim a bad debt for seven years from the tax return’s due date for the year the debt became worthless.

3. How Long Must You Keep Tax Records?

Retain tax records as long as the IRS can audit your return or assess additional taxes. The statute of limitations is generally three years after filing, meaning most 2021 tax year records can now be discarded if you filed by the April deadline in 2022. If you filed an extension, keep records from the extended due date for three years.

The statute extends to six years for substantial underreporting (over 25% of gross income). There’s no time limit if you never filed or filed fraudulently. So, keep actual tax returns indefinitely to prove legitimate filing.

Retirement account records should be kept until the account is depleted, plus three (or six) years. Real estate and investment records should be kept for as long as you own the asset, plus at least three years after selling, or six years to be extra cautious.

Being diligent with recordkeeping can help you avoid IRS issues down the line.

Still Have Questions?

Contact the office for help finding answers about your refund, filing an amended return or record retention.

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Helping a Family Member Buy a Home

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Making a family loan isn’t the only way to assist a loved one with purchasing a home. If you aren’t concerned about being paid back, a straightforward option is gifting cash. In 2025, you can give up to $19,000 to anyone without federal gift tax consequences under the gift tax annual exclusion.

If your loved one is married, you can gift up to $38,000 to the couple tax-free. If you’re married, you and your spouse can jointly give up to $76,000 to the couple, all without federal gift tax consequences (4 x $19,000).

Gifts exceeding these limits reduce your lifetime gift and estate tax exemption, which for 2025 is $13.99 million ($27.98 million for married couples). State tax consequences must also be considered. Contact the office to explore the best approach for your situation.

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Your Business Tax Information at Your Fingertips

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The IRS Business Tax Account provides information to sole proprietors, partners of partnerships, and shareholders of S corporations and C corporations. Eligible business taxpayers who set up an account can use the hub to make electronic payments, schedule or cancel future payments and access other tools. They can also view their current balances, payment history, other business tax records, and digital copies of select IRS notices.

A newly added Income Verification Express Service enables lenders to easily access the income records of a business borrower, provided the taxpayer has authorized access. Here’s more: https://www.irs.gov/businesses/business-tax-account

Got questions? Contact Us

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The Tax Side of Gambling

Gambling Dice

Whether you’re a casual or professional gambler, your winnings are taxable. However, the Treasury Inspector General for Tax Administration reports that gambling income is vastly underreported. Failing to report winnings accurately can lead to back taxes, interest and penalties. Here’s what you need to know to stay compliant and potentially minimize your tax liability.

Reporting of Winnings

Federal law requires reporting all gambling winnings, cash or prizes (such as from casinos, lotteries, raffles, horse racing and online betting) at fair market value. Certain winnings are subject to federal tax withholding, reducing your risk of interest and penalties.

If winnings exceed certain thresholds (for example, $1,200 for slots, $5,000 for poker), the gambling establishment must issue Form W-2G to you and the IRS. Even if you don’t receive a Form W-2G, you’re still required to report gambling income.

Amateur or Professional?

If you’re an amateur, you’ll report your gambling income on Form 1040, Schedule 1. You can claim gambling losses as itemized deductions, but only up to the amount of your gambling winnings.

If you gamble as a profession, the tax rules are a little different because your gambling activities are treated as a business. To qualify as a professional gambler, you must demonstrate that gambling is your primary source of income and that you engage in it with continuity and regularity. Contact the office for more information on the tax rules for professional gamblers.

Staying Compliant

Tax compliance isn’t tricky, but it’s important. Here are some tips:

Log your gambling activities.

Include details such as:

  • Dates and locations of when and where you gambled,
  • Types of wagers, and
  • Amounts won and lost.

A log ensures that you accurately report winnings and helps you claim deductible losses when applicable. Having this substantiation can also be beneficial if you’re audited. Remember that a log kept contemporaneously generally holds more weight with the IRS than one constructed later.

Maintain a file of gambling-related receipts, statements and other documentation.

Thorough documentation is critical, especially if you’ll be deducting gambling losses or if you’re a gambling professional and will be claiming gambling-related business expenses.

Adjust tax withholding or estimated tax payments if needed.

Remember that income taxes must be paid annually via withholding or estimated payments. If the tax you owe on the April 15 filing deadline exceeds what you paid during the tax year through withholding and estimated payments, you might be subject to interest and penalties.

A Risky Bet

The tax rules for gambling income can be confusing. However, failing to report winnings is a risky bet that can result in back taxes, interest and penalties. Contact the office for help.

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Stuck in the Middle: The Sandwich Generation

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The term “sandwich generation” was coined to describe baby boomers caught between caring for their aging parents and their children. Today, it most commonly applies to Generation Xers and older Millennials. If you’re caught in the middle, it might be time for honest discussions about pressing issues such as funding children’s higher education and paying for a parent’s long-term care.

Start with the “bottom” of the sandwich: your children. What’s appropriate to share with them depends on their age. However, by high school, you should be talking about their post-graduation plans and how much you can offer for college or other financial needs.

The “top” half of the sandwich can be more challenging. Depending on their health status, finances and other factors, your parents may not welcome your involvement in their decision-making. They might minimize or dismiss your concerns and be highly resistant. Initiate a frank family meeting with your parents, siblings and their spouses, if appropriate. Many issues can be sensitive, and emotions may run high, so be prepared. One session may not be enough to accomplish your objectives. Feel free to contact your Wheeler preparer for advice about what to focus on.

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