Case Study: Social Fulcrum

By understanding Social Fulcrum’s unique business situation, SmartBooks recommended following an accrual basis for maintaining Social Fulcrum’s books and records while following a cash method of accounting for tax purposes. The cash method provides flexibility to manage taxable income. For example, one common tactic is to pay any outstanding payables prior to year-end in an effort to accelerate the expense into the current tax year. Another common tactic is to invoice clients later in the month in order to defer income to the following tax year. Media companies, like Social Fulcrum, frequently receive upfront payments from clients to cover any social media advertising expenses. Unfortunately, if not timed right, this could result in income being recognized in one year and the corresponding expense being recognized in the following year. On a large scale, this can result in an inflated revenue number on the cash basis.

The SmartBooks accounting and tax teams worked in tandem to prepare a detailed tax plan to understand how Social Fulcrum’s income would be affected by this year’s accrual to cash adjustment. Based on current estimates, this included an inflated revenue number of approximately $752,000. While reviewing the balance sheet, SmartBooks also noticed that there was a large cash balance in Social Fulcrum’s bank account that was a result of prepayment from a client for media expenses. This analysis revealed that the pass-through income for shareholders in this scenario would be approximately $1.1M. Through this annual tax planning process, the SmartBooks tax and accounting teams were able to work with Social Fulcrum to devise a strategy to prepay a large vendor account and as a result more closely match the income and expenses in the same year.