One of the main reasons for hiring a professional to do your taxes is when you have questions or complex tax situations. For small businesses, freelancers or startup companies, there may not be an accounting department to handle things like invoicing or other accounts receivable tasks. When you're a department of one or someone who's only wearing the accounting hat temporarily, you may have some questions such as...
Do you have to pay taxes on accounts receivable?
How Does Accounts Receivable Affect Profits?
When paying taxes, you likely already understand that your profits are taxable. What about accounts receivable? Are they considered profits?
Profit is calculated as revenue minus expenses. Accounts receivable are expected payments on goods or services provided by your business. You've invoiced your clients and now you are waiting to receive payment. If you've not received it yet, it may or may not be considered part of your revenue.
When Is A/R Considered Revenue?
When you run accounting reports like Profit and Loss in software programs such as Quickbooks, you will have the option to choose your accounting method. If you choose the Accrual accounting method, then accounts receivable is counted as revenue as soon as you close the sale and invoice for it. Under the Cash accounting method, you will only count the revenue when payment has been received for that invoice. If you know which accounting method you are using and claiming on your taxes, then that will determine if accounts receivable (A/R) is considered revenue.
Will You Pay Taxes on Accounts Receivable?
If profit is revenue less expenses, and you're using the cash accounting method, you won't be paying taxes on A/R until those payments are received.
Under the accrual method, you're including A/R as part of revenue. Total revenue less expenses, in this case, means that you are being taxed on your accounts receivable.
If you have any questions about accounts receivable and need help with collections, please let us know. Enterprise Recovery can help with cleaning up current A/R, recovering bad debt or preparing your company to pursue legal action.