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[rod_torfelson_armada]

Hello everyone,

I think the subject lines says most of what I am wondering about, and I've tried my best to search & read related  discussions in "On the Money" before posting.

I am relatively new to consulting & newer to deducting expenses (as I understand it, on schedule c for expenses I incur.)

I did a fair amount of work in 2011 on projects for which I am now being paid, in early 2012. Can I deduct the expenses I incurred in 2011 for the 2011 tax year if I am not paid until 2012?

Thanks for any and all advice in advance.

[fleabite]

Based on your brief description, you would file a schedule C for your business for 2011. You would have only expenses and no profits, so you would report those expenses, resulting in a loss rather than profits on the business. When you do your tax return for the 2012 tax year, you will report the income that arrives in 2012 as well as any expenses you may have in 2012, but not those expenses you incurred in 2011.

[prytania3]

No. The tax man is not big on the accrual system of accounting.

[clean]

the easiest thing to do is claim "cash accounting".  You paid cash for those expenses in 11, so do schedule C and get credit for them.  Next year, you will likely get a 1099 MISC (If I recall off the top of my head), and that will be the input for the revenue. 

However, you may still be able to claim other or additional expenses in 12... Do you need a cell phone for this work the whole year?  write it off.  Do you travel by car as part of this job?  write down everything for the record and write it off. 

IF you try to use 11 expenses on your 12 schedule C I think that you will get in trouble if audited. 
Unless you are audited, though, you can do anything.  (ie. Nothing is illegal unless you get caught).

But better safe and legal when it comes to the IRS. 

[ucprof]

I do the cash accounting system and file schedule C.  I get 1099s from my clients.  It all seems to work well.  I have very few expenses mainly mileage and meals on the road and a few odds and ends for my home office.  The occasional hotel charge for an overnight stay.  My consulting income is not that big I consider it in the "frosting" category rather than "cake".

[prytania3]

Actually if my memory serves me correctly, and it may not, you are supposed to claim profits going forawrd but not expenses.

[pedanterast]

I am CPA.  Prytania is wrong and you can, indeed, deduct the expenses in the year you paid them.  That will create a net loss which you can use to offset your other income.  Of course, in the year you get paid that will give you higher income, to be added to your other income.  Whether this ends up being good or bad depends on your tax brackets in the two years.  But, it's not optional so you have to do it that way anyway.  IRS requires cash basis accounting except where inventory is a material income producing factor.

[prytania3]

I was thinking of this scenario:

 If you get a huge purchase order from a new customer, that would show as income; then the IRS wants their 30%, but since the customer hasn’t paid (and you, silly silly, paid your bills on time), you don’t have the cash to pay. Oops!

[pedanterast]

No.  A purchase order is not income for either tax or financial accounting purposes.  It's an executory contract.

[rod_torfelson_armada]

Sorry for the late reply, but thank you all for the helpful advice & suggestions.

RTA