Many of the companies we’ve worked with have been reluctant to adopt accrual-based books because their tax preparer told them they will lose tax benefits if they do.
We always recommend filing your taxes in whatever way your tax preparer advises you to.
However, you don’t need to keep your management books in the same way your tax books are kept. In fact in most cases, you shouldn’t.
One example is accelerated depreciation. There are sometimes IRS programs which allow accelerated depreciation to be taken on certain assets. This can result in a very large depreciation expense (and thus deduction) in the year an asset is purchased and then a much smaller depreciation in the following years. There could be tax benefits to this depending on which way one thinks tax rates are headed, but the resulting income statement trends will lead to very large distortions. Your income statement in the first year will look terrible while all subsequent years will show profits better than they really are, making it almost impossible for you and your investors and lenders to know how you are really doing. Instead it’s better to depreciate your assets over the actual economic life of the asset in your accounting books and let your tax depreciation schedules stay only on your tax return.
This is just one example but there are plenty more. The good news is that in many accounting software packages (such as QuickBooks), if accruals and depreciation schedules have been done properly, switching back and forth is easy. You can click the cash-basis setting to create reports to give your tax preparer and then click the accrual-basis setting to look at the reports that best help you manage your business. Your Correct Profit advisor can help make sure your accrual-basis books are set up properly.