What is the difference between cash and accrual basis of accounting?How does this affect the Deferral of Income and Acceleration of Expenses

Cash Basis- follows the flow of cash so expenses are deductible when paid and income is reportable when constructively received.

• Ease of Tracking: Income is reported when received, and expenses are deducted when paid, making it easier to manage and understand cash flow.
• Tax Deferral Opportunities: Practices can sometimes defer income recognition by timing their invoicing and controlling when they incur deductible expenses.
• Common for Smaller Practices: Cash basis is more prevalent among smaller veterinary practices because it has fewer recordkeeping requirements and avoids the complexity of managing accounts receivable and accounts payable.

Accrual Basis – matches revenue and expenses as expenses are deductible when incurred and revenues are reportable when earned even if not received.  Accrual basis businesses:

• Track Accounts Receivable for invoices to customers and Accounts Payable for bills received but not yet paid.
• Have larger operations or inventory-heavy practices such as those with significant retail or in-house pharmacy operations.
• May wish to match income with expenses more accurately for financial statement purposes.
• Are required to use the accrual method due to exceeding the average 3-year, $25M gross receipts threshold (as of 2024, subject to adjustment).

Ultimately the basis of accounting influences when income and expenses are recognized for financial statements and for tax returns. While cash basis is prevalent, the client and I weigh this decision with veterinary-specific tax and financial strategies to determine the most advantageous method based on the practice size, structure, and goals.

Most veterinary practices operate on a cash or hybrid accounting basis due to inventory tracking, but an effective way to defer income is by delaying billing for business clients – such as breeders or large barns – who are invoiced rather than required to pay immediately. By issuing invoices near the end of the year or in the following year, the practice can defer recognizing income until payment is received in the new year. Vet practices should not be carrying large accounts receivable bills and should be receiving payments at the time of service. For small animal practices where payment is received at the end of the appointment, deferring income might not be an option.

On the cash basis of accounting, to accelerate expenses, pay as much as feasible before year-end, assuming cash flow will not be adversely affected. This includes charges made by credit card. You are allowed to pay expenses up to a year in advance. Any expenditure with over a year’s worth of value would become a prepaid expense and nondeductible. Again, like Section 179 (which allows for immediate expense), these choices need to be made with the long term in sight. What we deduct this year will not be available next year (unless we continue to prepay up to a year in advance), and like the above example, ultimately catches up in time. Therefore, it may make sense to allow those expenses to flow to a higher revenue year versus gaining the benefit now.

Conversely, you may want to do the opposite if you know next year is going to be far higher in income than the current year. Absent a crystal ball, this is where planning comes in, evaluating trends, understanding where your business stands and where it expects to go. These influence and help you make these types of decisions.