One item that interested me was the tax issue he raised - getting income in one year, and having to pay tax on that, but then expenses in the following year.
In my jurisdiction this is known as future-income, and essentially in year 1 a simple accounting provision is made (hence reducing profit in year 1) which has the effect of moving the revenue into the year where the order is fulfilled.
This is especially true for subscription revenue where "annual amounts" are almost always falling into 2 financial years.
This is enormously important from a refunds point of view - it's hard to give out refunds if the tax has gobbled 30% of the amount collected.
From the article he's suggesting this practice is not universal? Which somewhat surprises me...
It's possible to do this on an accrual basis, but when I have spoken at times to accountants about it, they have discouraged it: the IRS can be dubious, and it makes the most sense to run your business that way if you're entirely organized around it (i.e., you have a profound mismatch in your basic function between income and expense within calendar or fiscal years).
On the contrary, most places enforce this kind of 'deferral' (the accruals concept) to stop cheating. Imagine i took all of the cost first and the revenue later. I could offset the loss from this against my other income (which is taxed at source) and get a refund out of the tax authorities! It would be like an interest free loan!
It's also enforced here to keep reports of profits sane. If I report revenue as profit (without adjusting for future expense) then I'm artificially reporting "higher profit than what actually happened."
This artificially boosts share prices, and other things, which can have unfortunate effects downstream.
Take Worldcom. They defered expenses (by capitalising the phone bill to be depreciated in future years) thus boosting reported profits. With, um, unfortunate results.
So yeah, in my jurisdiction its enforced. But I can imagine that in other places its not, or revenue is taxed, or whatever.
In many countries tax office does not care about your bookkeeping result. Tax is calculated using separate rules (and then becomes part of bookkeeping result).
Also if we go to philosophical discussions: you can have great bookkeeping result yet no money, or lots of money now, but unprofitable projects (e.g. construction companies).
In the US, for an individual/LLC, my understanding is that the default is that Kickstarter funds received would be income pure and simple reported on a 1099-K past some threshold. https://www.kickstarter.com/help/taxes
There may be ways to defer some of that but you'd probably need to work with an accountant.
It is called the 'Accruals concept', expediture must be matched to it's revenues. This is a fundamental principal of accounting.
It would be extremely novel for tax to be on a 'cash basis', but I'm sure there are places it is true. I think it might be an option on micro entity accounts for instance.
A classic example of this in action is with stock/inventory. Things still in stock at the end of a period don't hit the profit in that period, only things that are sold.
It's not at all novel. Small businesses in the US typically have a choice (C corps do not AFAIK) to use cash-basis accounting rather than accrual.
Which makes sense. If they're not making large capital investments that they hope will result in revenue over time, they're largely cash flow businesses.
Tax result <> Bookkeeping result. In fact bookkeeping result as per US GAAP van be different than the result under IFRS or regulations of other countries (for example due to different approach to depreciation).
Many countries calculate tax excluding accruals to stop fraud. When you have the cash now and need to pay tax next year, you could as well "run away with the money". Or even not run with the money, just spend it - and then end up unable to pay tax for two years.
Technically this fraud could be committed at any moment, but when the cash would lie on your account for a year, you could think abiut it more often.
Also conceptually: if accruals are allowed, you can basically shape your tax result to never pay any tax? Make bigger accruals every year.
>> if accruals are allowed, you can basically shape your tax result to never pay any tax? Make bigger accruals every year.
That's not really how they work. You don't get to just make up a number (at least we dont). You can only defer income that's for work not yet done. For work you did do you get taxed.
But I appreciate all the replies, and it goes to show how tax policies change from place to place. Which is why you don't get advice from the Internet- you get it from local accountants and lawyers.
In my jurisdiction this is known as future-income, and essentially in year 1 a simple accounting provision is made (hence reducing profit in year 1) which has the effect of moving the revenue into the year where the order is fulfilled.
This is especially true for subscription revenue where "annual amounts" are almost always falling into 2 financial years.
This is enormously important from a refunds point of view - it's hard to give out refunds if the tax has gobbled 30% of the amount collected.
From the article he's suggesting this practice is not universal? Which somewhat surprises me...