Accounting Methods  Cash basis Income recorded when received  Constructive receipt: made available without restriction Expenses recorded when paid  Pay January mortgage payment in December  “Bunch” charitable contributions into one year  Pay all of 2009 mortgage interest in 2008?

Accounting Methods  Cash basis Used by:  Individuals  Sole proprietors  S corporations  Partnerships and corporations < $5 million gross receipts  Farm partnerships and corporations < $1 million gross receipts  Corporation majority owned by family members < $25 million gross receipts  Personal service corporation

Accounting Methods  Accrual basis Income recorded when earned Expenses recorded when incurred  Amount of liability known Used by  Manufacturers  Wholesalers  Retailers With > $1 million gross receipts

Sole Proprietorship  One owner unincorporated business  Income is only taxed once On owner’s Form 1040  Schedule C  Advantages Cheap, easy to set up Keep all the profits NOLs: in general, offset other income  Then, carryback 2 years; forward 20 years  Disadvantages Can’t divide ownership interest to gift

Sole Proprietorship  Self-Employment Tax S-E Income > $400 Tax:  15.3% up to $106,800 in 2010  2.9% above $106,800 in 2010 Medicare only

Partnerships All tax items pass through to partners based on their ownership interest  Income, capital gains, etc.  Income is taxed only once  Losses can generally offset other income General partnership  All partners liable Limited partnership  Limited partners investors; can’t participate in management; can only lose investment  Must have at least one general partner

Partnerships  Advantages Income only taxed once Losses may offset other income Can make special allocations of income/loss  Disadvantages Mutual agency Unlimited liability Division of profits: who is smarter?