Your accounting method determines when income and expenses are recognized for tax purposes. Cash basis recognizes income when received and expenses when paid. Accrual basis recognizes income when earned and expenses when incurred, regardless of when cash changes hands. NJ follows the federal method election, and changing methods later requires filing IRS Form 3115. Greg Monaco, CPA recommends cash basis for most NJ service businesses because of its simplicity and tax planning flexibility.
The accounting method you choose has real implications for tax liability, reporting, and compliance.
Cash Basis
Recognize income when received, expenses when paid. Simpler, more tax planning flexibility.
Accrual Basis
Recognize income when earned, expenses when incurred. More accurate picture of profitability. Required for businesses with inventory or over $29M average gross receipts.
NJ Treatment
NJ follows the federal method election. Changing methods requires IRS Form 3115.
My Recommendation
Cash basis for most NJ service businesses. Simpler, flexible, and adequate without inventory. Accrual basis if you’re growing significantly or have complex inventory.
Key Takeaway
Cash basis accounting is the right choice for most NJ service businesses without inventory. It is simpler, provides more tax planning flexibility (you can control timing of income and deductions), and is adequate for businesses without complex inventory. Accrual basis is required for businesses with inventory or average gross receipts exceeding $29 million, and it provides a more accurate picture of profitability for larger operations.
Related reading: Why Good Bookkeeping Matters | Understanding Financial Statements | Bookkeeping services
