| Just to add one more note to this lengthy thread... :-) > Dr. gets his $100 for the visit and gets a $300 tax deduction I think that is the phrase all of us have been jumping on. What you wrote there is simply not true. There is no scenario, regardless of whether the doctor uses cash or accrual accounting, where they get $100 for the visit and a $300 tax deduction. There are three possible situations here: 1. Doctor uses cash accounting. The $400 invoice is not a taxable transaction. Doctor gets paid $100, reports it as income in the year it is paid, and that's that. There is no $300 deduction. 2. Doctor uses accrual accounting and is paid the same year. They report $400 of income along with a $300 loss in that year. Net income is $100, and doctor pays taxes on the $100 income. Their tax for this transaction is exactly the same as if they had used cash accounting. 3. Doctor uses accrual accounting and is paid in a subsequent year. They report $400 of income in the first year and pay taxes on the entire $400. Then, in the year they get paid, they report a $300 loss, because they were only paid $100 out of the $400 they previously declared as income. The only reason this $300 loss exists is that they already reported the entire $400 as income in the previous year and paid taxes on it. They aren't getting $100 income and a $300 deduction, they got $400 income in one year and a $300 deduction in a subsequent year. As you mentioned in another comment, there may be reasons why a doctor would want to do this. Perhaps they just started their practice and are in a lower income bracket this year but expect to be in a higher bracket next year. In that situation the accrual method may help balance their income across those two years: they can pay taxes on the accrued (billed) income in the year that their tax rate is lower, and then take the loss in the next year at a higher tax bracket. There may be other reasons to do this as well, but none of them change the fact that accrual accounting would mean they reported $400 in income along with the $300 loss, whichever years those happen to be. It's not $100 in income combined with a $300 deduction, whichever way you account for it. |