The Cash Flow Method of Tax Accounting


The Cash Flow Method of Tax Accounting

How two small changes in business accounting will create jobs and help bring manufacturing back to the United States.

American businesses are suffering. Profits for many companies are minimal, wages for workers have stagnated, costs are rising and so is debt. Manufacturing has all but left these shores. And all of this is unnecessary.

There are many reasons for the economic doldrums here in America. We have the highest corporate tax rate in the world, nearly double that of the United Kingdom. We have enough regulations to bind any business into an immobile knot. Business leaders are paralyzed by continual indecision in Washington, never knowing how to plan for the future and always wondering when the next punitive rule will be passed.. All of these are systemic problems that must be addressed over time through the painfully slow political process.

However, if we can start with changing two simple accounting rules, American business could once again be leading the world, unemployment would no longer be a problem, and manufacturing might actually begin to come back home.

Is this some accounting trick, just moving numbers around to make the balance sheet look better? No. It’s a fundamental separation of tax accounting from financial accounting, entailing the elimination of Depreciation and Cost of Goods Sold (COGS) from tax accounting. Those two components of existing tax accounting do more than anything else in the tax code to drive businesses out of business… and they never should have been a part of tax accounting to begin with.

If you are a CPA, what you just read is heresy. If you don’t know much about accounting, but do know about business, what you just read is probably making you scratch your chin about now. In either case, keep reading. Lay aside pre-conceived notions and your formal training for the next ten minutes, and open your mind to the possibility that what you have been taught might not be correct, at least in the context of tax accounting. What follows is the perspective of a small business owner with over 20 years experience running his own successful company. However, this perspective is a reality faced by every business owner, especially those involved in product-based companies.

This proposal is about what I am calling “The Cash Flow Method” of tax accounting. Although this does not yet exist in America, it is something that is firmly rooted in real world business experience and common sense logic.