Deductions Depend on Whether You Are Cash-Based, Accrual-Based Taxpayer

Question: I am a resident physician who does independent contract work and will be filing a 1040 C-EZ. My only business expenses are mileage and my licensing and DEA fee, which I paid at the end of 1997. Can I deduct those fees as business expenses for 1998 if I got them to do the independent contract work that started in 1998?

--Joey Liu, Long Beach

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Answer: If you file a 1040 tax return, you can file a Schedule C-EZ “net profit from business” statement with it. Last year was the first time the C-EZ short form was used. It is useful for businesses with expenses of $2,500 or less, reporting a profit rather than a loss, no inventory and no employees. There are other restrictions on its use as well, so check it out before you file it.

As far as taking expenses from one year and applying them to income derived in the next year, you’re going to have a problem with that unless you are an accrual-based taxpayer, as 99% of corporations are. Accrual-based taxpayers record income when it is earned, not necessarily when they actually receive payment, and record expenses when they’re incurred, not necessarily when they’re paid out.

Most individuals, however, are cash-based taxpayers, meaning that they record income when they actually receive the money, not when it’s earned--which may be weeks or months earlier. Cash-based taxpayers also record expenses when they are paid out, not when they’re actually incurred. So if you purchase something but don’t actually pay for it until a bill comes due weeks or months later, you’d record the expense when you actually write out the check for the payment.

If you’re cash-based, you have to file your returns based on the expenses and income you actually spend and receive in that particular calendar year. You could go back and amend your 1997 return if you never took deductions for those fees, but whether it’s worth it or not will be an economic decision because you’ll probably have to pay a preparer to do the amended return.

I’d definitely advise you to take your situation to a tax preparer and/or certified public accountant. You want to file the right forms and declare the correct information with the IRS and not risk making a mistake that will cost you if you are audited sometime down the line. An expert can also give you advice on setting up a qualified pension plan, like an SEP, that may be very beneficial to you as a self-employed person.

--Michael Rozbruch,

CPA and tax resolution specialist,

Tax Resolution Services, Tarzana

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If you have a question about how to start or operate a small business, mail it to Karen E. Klein at the Los Angeles Times, 1333 S. Mayflower Ave., Suite 100, Monrovia, CA 91016, or e-mail it to kklein6349@aol.com. Include your name, address and telephone number. The column is designed to answer questions of general interest. It should not be construed as legal advice.