Most individuals and many small businesses operate on a cash basis (as opposed to an accrual basis). This means that money (or any property of value) received is counted as revenue when it is actually received. Money is counted as an expenditure when it is actually spent. Such an accounting method creates incentives to delay the receipt of income and accelerate the time at which expenditures are made. For example, an individual were employed from January 1, 2016 to December 31, 2016, earning $10,000 for that period, they would be in the lowest federal income tax bracket for 2016. If that same individual timed their employment to begin in December 1, 2015 and end November 1, 2016, they would escape all federal income tax liability for 2016 (earning $9,166.67 for the 11 months for which they were paid in 2016). Timing really is everything for federal income tax purposes.
Circular 230 Notice: Pursuant to U.S. Treasury Department Regulations, all tax advice herein is not intended or written to be used, and may not be used, for the purposes of avoiding tax-related penalties under the Internal Revenue Code or promoting, marketing or recommending advice on any tax-related matters addressed herein.
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