What is the difference between the cash or accrual method?
Using the cash basis method of accounting, income is reported when received.
Using the accrual basis method of accounting, income is reported when invoiced.
How is sales tax reported?
Most states either default to or require that customers report sales tax using the accrual method of accounting.
For example, New York and California require accrual reporting for sales tax even if the taxpayer uses cash-based accounting for income tax purposes. Washington only permits cash reporting for sales tax if a taxpayer is using cash accounting for federal income tax purposes.
Practically what this means is:
In January you send out an invoice for $1,000 + 8% ($80) sales tax = $1080, with 90-day payment terms, in a state that requires a monthly sales tax return. Your customer does not pay the invoice until March. That invoice will be reported on your January sales tax return, which is filed and paid in February.
Because accrual is the industry standard, and required in many states, Anrok follows an accrual approach to sales tax.
What if my customer never pays?
Using the accrual method for sales tax reporting means a taxpayer may remit the tax to a jurisdiction and for whatever reason their customer never pays their invoice, leaving the taxpayer out of pocket for the tax. A taxpayer is entitled to a credit or refund in these situations.
The best practice is to VOID invoices that are deemed uncollectable. Anrok will see that VOID and process a negating transaction to claim a credit for that tax on the next open return with the jurisdiction. In certain integrations, customers can also use credits or mark invoices as uncollectible and Anrok will likewise be able to take the credit on the next return, refer to your specific integration guide for more details.
If in January you send out an invoice for $1,000 + 8% ($80) sales tax = $1080, in a state that requires a monthly sales tax return. You pay that $80 over to the state in February with your filed return. Your customer does not pay the invoice and it is deemed uncollectible or written off as bad debt in April. If you void/mark uncollectable that invoice in April, Anrok will create a negating transaction and take an $80 credit on your April return.
How can I employ a cash method in Anrok?
While Anrok does default to the accrual method, we do allow customers to edit transactions in and out of their returns, effectively giving customers the ability to pull out transactions that have not yet been paid if they want to employ some level of cash reporting on a return.
Although this approach may not be technically permissible depending on the specific jurisdiction, it is a calculated risk that customers may choose to take. With this Anrok feature, customers enjoy the flexibility, especially concerning large invoices, to manage their cash flow accordingly.