Question

Cameron operates a janitorial services and HVAC Company called Squeaky Clean (SC) and is trying to determine for 2018 whether he should use the cash or accrual method of tax reporting. He has the following items of income and expense:

a. SC contracted with a hospital in December 2017 to install HVAC in its new wing. The contract price of $80,000 includes $50,000 for materials (COGS). The remaining cost covers the labor done by SC. The contract requires upfront payment. The hospital paid SC on December 28, 2017. The contract required work to be completed by January 31, 2018. SC completed the contract by January 27.

b. SC entered into several other contracts in 2018 where work was completed by year-end. The work cost $130,000 in materials and SC elects to immediately deduct supplies. SC billed out $240,000 but only collected $220,000 by year-end. Of the $20,000 still owed, Cameron wrote off $3,000 he didn’t expect to collect as a bad debt from a customer experiencing extreme financial difficulties.

c. SC entered into a 3 year contract to clean the hospital mentioned in part a. The contract specifies monthly cleaning from July 1, 2018 through June 30, 2021. SC received payment in full of $9,000 ($250 per month for 36 months) on June 30 of this year.

d. On August 1, 2018 SC needed more storage space and paid $900 to rent a garage for 12 months.

e. On November 30 of this year SC decided to get logos painted on the side of their work vans. SC hired Painting Plus Co. SC paid $500 down and agreed to pay the remaining $1,500 upon completion of the job. Painter’s Plus said it wouldn’t be able to begin the job until January 15, 2019 of next year and said it would take one week to complete. Due to unforeseen circumstances, Painters Plus did not complete the job until April 1, 2019, at which time SC paid the remaining balance due.

f. Cameron’s son, Nathan, helped him finish some cleaning jobs. Nathan was paid $600 for his work (a reasonable amount). However he was not paid until January 2019.

g. SC also paid $1,000 for interest on a short-term bank loan relating to the period from November 1, 2018, to March 31, 2019.

Please calculate Squeaky Clean’s Taxable Income using both the Accrual and Cash Methods of accounting (see next page for table) and advise Cameron which option would be best for him.

Example: James received $500 from a contract a customer signed in December. He performed the work in January of 2018. He purchased $100 in product for the project in 2018.

	Description	Cash	Accrual	Explanation
Income
Ex.	Customer Contract	0	$500	For cash, income is recognized in the period received which was 2017, but for accrual, income is recognized when received.
a
b
c
Total Income
	Description	Cash	Accrual	Explanation
Expenses:
Ex.	Customer Contract	$100	$100	For cash, expenses are deducted as paid. For accrual expenses arising from services provided to another individual are recognized when the services from which the expense arose is provided.
a
b
b
d
e
f
g
Total Expenses
Net Income

Answer 1

Squeaky Clean (SC)
YE 2018
Income	Description	Cash	Accrual	Explanation
a	Hospital contract	-	40,000	For cash, income is recognized in the period received which was Dec' 2017, but for accrual, income is recognized in which works is carried out.
b	Other Contracts	2,20,000	2,40,000
c	Cleaning contract	9,000	1,500	Received full payment of $9000, however monthly billing is of $250 for 6 months from July'18.
Total Income		2,29,000	2,81,500
Expenses:	Description	Cash	Accrual	Explanation
a	Hospital contract	-	25,000	For cash, expenses are deducted as paid. For accrual expenses arising from services provided to another individual are recognized when the services from which the expense arose is provided.
b	Other Contracts	1,30,000	1,30,000
c	Receivable written off	-	3,000
d	Cleaning job to Nathan	-	600	Cleaning job of Nathan incurred in current year, However paid in Jan'19 next year.
e	Storage space	900	375	$900 paid for 12months, however, monthy rental is $75 from Aug'18, total $375 for 4months.
f	Painting cost	500	-	Downpayment of 500 during the year, however, work completed next year.
g	Interest	1,000	400	Paid interest 1000 for Nov'18 to Mar'19. Current year portion for Nov''18 and Dec'18 is 400.
Total Expenses		1,32,400	1,59,375
	Net Income	96,600	1,22,125
			25,525
Note:
Net Income as per accrual basis is 122,125, which higher of $25,525 income as per cash basis. Therefore, we can suggest to follow cash basis to save some income tax in current year.