Accrual Versus Cash Tax Returns: Choosing a Filing Method
Veterinary professionals excel at providing medical care to pets, but understanding and caring about finances is equally important for a successful practice. In our previous blog post, we talked about bookkeeping methods, expressing our appreciation for the accrual system. In this blog, we discuss why and how you should file a cash tax return based on those accrual books and when you should ask for professional help.
Accrual versus cash accounting: A recap
Here’s a quick overview of the accrual and cash bookkeeping methods:
- Accrual accounting — This method records income and expenses when earned or incurred, regardless of when cash flows in or out. Accrual accounting reflects unpaid invoices and upcoming expenses, which helps with planning.
- Cash accounting — The cash method records income and expenses only when cash moves in or out. This approach is more straightforward for bookkeepers and managers who don’t want outside help but provides less financial clarity.
Why file a cash tax return based on accrual books?
Although accrual accounting works well for most practices, accrual tax filing may not be in a practice’s financial best interests. In many cases, a cash tax return is the better choice. Although you and your CPA should always determine what’s best for your individual situation, here are a few reasons why this combination works:
- Better financial insights — Accrual accounting offers a more accurate snapshot of financial health and helps predict future profitability, which helps when planning and determining the best time to make significant purchases like equipment.
- Flexibility — Practices filing a cash tax return based on the clarity that accrual books provide can manage tax liability, since you’ll pay taxes only on income received before year-end. You can also plan large purchases strategically to maximize deductions and lower taxable income.
- Smooth handoffs — The good news about choosing accrual books and filing a cash tax return? A skilled veterinary bookkeeper and veterinary-specific CPA can handle this together. These methods aren’t for everyone, because they require specialized knowledge, and may not accommodate all circumstances, but they typically result in a better overall financial situation. Working with professionals helps you benefit from complex methods without existing staff and workflows being unduly stressed.
Working with a veterinary CPA
Your bookkeeper and CPA can significantly affect how well your tax season goes. Our friend Jharid Pratt, CPA, MST, and CEO of Granite Peak Associates, a veterinary-specific accounting firm, pointed out some benefits of working with someone who knows your business model:
- Industry expertise — Veterinary CPAs understand your operations, expenses, revenue patterns, and seasonal fluctuations.
- Tailored advice — A CPA familiar with veterinary challenges, such as inventory costs, can provide more relevant recommendations and personalized tax strategies.
- Ongoing support — Veterinary CPAs recognize the importance of year-round tax planning and ongoing guidance to avoid surprises.
How to prepare for cash-based tax filing
Your CPA can determine the best tax filing method and manage the accrual-to-cash conversion, so you need to do little except follow their professional advice. But you can take a few steps throughout the year to make your CPA’s job easier:
- Organize receivables and payables — Keep clear records of outstanding payments and invoices.
- Routine check-ins — Check in at least quarterly with your CPA, so they can make adjustments and stay on track.
- Strategic timing — Consider delaying or moving up purchases or payments according to your financial team’s advice to optimize deductions.
For veterinary practices, accrual-based book-keeping and cash tax filing is an effective strategy but often requires professional assistance. The combination can help you make informed business decisions, while minimizing tax obligations and maximizing practice success. To learn which bookkeeping and tax filing strategies will work best for you and your veterinary business, schedule a meeting with the VetBooks team.
