Cash Basis Taxpayer

Most of us probably fall into the category of a cash basis taxpayer. That means we report income that we actually received in the current tax year, and not what we expect to receive in the next tax year. The same holds true for expenses we want to deduct. Individuals can only claim expenses paid during the current tax year and not those that have only been billed for.

On the other hand, an accrual taxpayer can claim sales once the product ships, even though the customer has not paid yet. The same with expenses...you incurred them, but haven't paid the bill yet. You can still deduct them under the accrual method.