Cash Basis Reporting

[Corduroy Frog]

A cash basis company wishes to increase its taxation for 2021.  If they borrow $100,000 from a line-of-credit on December 30th, and don't spend it, will this result in higher taxation?

[Lion EA]

Loan proceeds are not income; loan repayments are not deductions. Those are balance sheet items, not P&L items. Only the interest on a biz loan is a deduction; in your scenario, their first interest payment would be January 2022.

If they're trying to move taxable income to 2021, maybe expecting higher tax rates in 2022, then they need to accelerate collections and postpone spending/paying their own bills. Look at their P&L for possibilities.

[Lee B]

This isn't a serious question, right? You're just trying to provoke a response?

 

[Corduroy Frog]

It is a serious question CBS.

What appears to be an idiotic strategy which results in higher taxation is actually a compliance effort promulgated by SBA requirements for a govt contractor.  The effect is that compliance with SBA is worth the extra tax money.  Falling out of favor with SBA can be disastrous compared to the payment of extra taxes.

[DANRVAN]

1 hour ago, Corduroy Frog said:

It is a serious question CBS.

But how can you seriously ask if taking out a loan is going to increase taxable income?  

As Lion explained it has no effect on profit and loss.  Accounting 101.

[Corduroy Frog]

Lion, borrowing money has no effect for a company reporting on conventional accrual basis.  Even I am aware of that.

The question revolves around cash basis reporting.  If a loan is considered "cash and equivalent" then there would be no effect. 

Cash?  Profits plus/minus changes in all balance sheet accounts affect cash accounts.  That is the reason for the question.

[jklcpa]

3 hours ago, Corduroy Frog said:

Lion, borrowing money has no effect for a company reporting on conventional accrual basis.  Even I am aware of that.

The question revolves around cash basis reporting.  If a loan is considered "cash and equivalent" then there would be no effect. 

Cash?  Profits plus/minus changes in all balance sheet accounts affect cash accounts.  That is the reason for the question.

Still, your question shows lack of understanding of basic bookkeeping and taxation. The additional borrowing would increase cash and increase loans payable, both balance sheet accounts. This has no effect on profits or taxable income whatsoever no matter what accounting method is used. 

[Lion EA]

10 hours ago, Corduroy Frog said:

 If a loan is considered "cash and equivalent" then there would be no effect. 

A loan is a Liability on the Balance Sheet, a short-term or long-term liability. Cash and equivalent is an Asset on the Balance Sheet.

10 hours ago, Corduroy Frog said:

Cash?  Profits plus/minus changes in all balance sheet accounts affect cash accounts.  That is the reason for the question.

The loan would cause Cash/Assets to increase on the Balance Sheet, but it also would also increase a Liability in the same amount. The Balance Sheet still balances, but nothing happened to the Profit & Loss Statement at all. Nothing happened to Taxable Income.

Do you do his bookkeeping? Follow the flow. If you receive his books, make sure you get detail (trial balance, QB backup, something where you can drill down to transactions) and then follow the flow. Follow the flow on his tax return. You'll see where the loan ends up, both as Cash in his bank account under Assets and the balancing Liability account in the same amount.

If he wants to pay more 2021 tax, he could accelerate his collections on outstanding invoices (maybe request down-payments on new invoices) &/or spend more (purchase now the supplies he'd buy in 1Q2022 anyway, pay bonuses, pay any outstanding bills he has). Look for Profit & Loss items that increase his income or increase his business expenses.

[Lee B]

This reminds me of a quote from a book I am reading, "Your tenuous grip on reality is greatly exaggerated."

[Corduroy Frog]

Lion, thank you for your sincere attempt to help.

If one were prepare a Cash Flow statement, by accounting for Depreciation, changes in Accts Receivable, Accts Payable, Accrued Payroll, and other balance sheet accounts, in conjunction with profit, would not Cash be increased by an increase in Loans Payable?

This perspective may not change the answer to my question, but it may reflect that the question wasn't nearly as stupid as it appears to others.

[Lion EA]

Increasing Cash does NOT increase taxability, which was your question.

Yes, due to a Loan,  Cash is increased, but so is Loans Payable. In non-accounting terms, it's a wash. You haven't changed the P&L. You haven't changed Taxable Income.

You seem to be stuck on Cash, but even Cash isn't changed in a vacuum. And, the amount of cash or whether it increases or decreases has nothing to do with taxability -- by itself. Your question should be about WHY cash increased or decreased: was taxable Income received or were taxable Expenses disbursed?

Pick up an Accounting 101 text &/or take Accounting 101 at your local community college or online.

[Corduroy Frog]

Thank you Lion, and a Merry Christmas to all.

[Lion EA]

https://forum.thetaxbook.com/forum/discussion-forums/main-forum-tax-discussion/307209-cash-basis-taxation

[Pacun]

The company wants to receive some money as a loan but report it as earned income, right? Or get a loan and then have the lender give up on the loan and report it on a 1099-C and that will make that amount taxable.  I don't see an elegant way of increasing income. 

What if the owner doesn't get pay in December or pay its employees in January or (maybe too late) don't pay December's rent until Jan 1st.

[jklcpa]

37 minutes ago, Lion EA said:

https://forum.thetaxbook.com/forum/discussion-forums/main-forum-tax-discussion/307209-cash-basis-taxation

Thank you, Rita!

[jklcpa]

@Corduroy Frog

Did you forget that there is overlap of members across these professional forums? I don't mind that people ask the same questions on multiple sites, but I find it totally rude and insulting of you to post on another forum that those of us that took the time to try to help you here did not address your question properly, that we were addressing it as accrual basis, and gave you incorrect answers when, in actuality, it is you that didn't understand the concepts or the answers that were provided above. You can be sure that I will not waste any of my time helping you in future on any forum, no matter what other name you may post under either!

[Corduroy Frog]

7 hours ago, jklcpa said:

@Corduroy Frog

Did you forget that there is overlap of members across these professional forums? I don't mind that people ask the same questions on multiple sites, but I find it totally rude and insulting of you to post on another forum that those of us that took the time to try to help you here did not address your question properly, that we were addressing it as accrual basis, and gave you incorrect answers when, in actuality, it is you that didn't understand the concepts or the answers that were provided above. You can be sure that I will not waste any of my time helping you in future on any forum, no matter what other name you may post under either!

I'm not going to respond to this.  One might review the thread and detect which party is insulted.

[jklcpa]

Well I will respond so that people know that you are over on the other forum trying to CYA and still saying that we gave incorrect answers when it was you that didn't understand the concept and the very basic answers given, and it was YOU that LATER ON brought accrual basis FINANCIAL ACCOUNTING REPORTING concepts into the discussion. 

Also, after you posted on the other forum, early on in the discussion another one of the members there also tried to tell you nicely that it was unreasonable to expect anyone there to comment on the discussion here on this forum without seeing the EXACT questions and EXACT comments that were provided.