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If a company buys an equipment for a client and bills the client at exactly the same cost, no more, no less, and the client pays the company back in the exact amount in the subsequent fiscal year, should the company still be putting the expense in the taxes? If so, should the expense go in the prior year and the revenue in the subsequent year? Or should the expense and revenue be recorded when latter occurs so they zero out?

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It depends on whether cash or accrual basis accounting is being used. With cash basis, there'd be an expense in current year and the income would show up in the subsequent year (transactions are recorded when money changes hands). With accrual basis, the expense and revenue would be recorded in current year (when the revenue was earned, not when it was received). Most small businesses use cash-basis, businesses can (sometimes) switch accounting methods, but it requires IRS approval (have to file Form 3115).

  • Okay. Just to be sure I understand your point, in the cash-basis case, the company is going to pay a little less tax in the current year since that expense is taken into account, and instead will pay a little more tax next year since as you said the transactions are recorded when money changes hands. Thanks. – 2q. Mar 3 at 6:36
  • @2q. That's correct, and accrual-basis helps smooth this out a bit for some companies. – Hart CO Mar 3 at 16:10

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