Cash Flow Accounting

One of the major complications of tax law and accounting pertains to ways in which tax law and accounting rules differ from cash flow. A cash flow based system could simplify the law and eliminate many loopholes.

How would it work?

Loans

* Loan proceeds would be income.
* Principal payments on loans would be an expense to the person paying and income to the person receiving them.

Capital Expenses

* The purchase of a capital asset would be an expense.
* There would be no deductions for depreciation, amortization.
* The proceeds from the sale of a capital asset would be income without reduction for basis.
* There would be no distinction between ordinary income and capital gains.

Sale of Goods

* The sale of inventory would be a gain, without a reduction for cost of goods sold, when paid for.
* Purchases of inventory would be an expense.
* There would be no deductions for bad debt.

Entities

* Dividends and distributions paid would be deductible as an expense by a corporation, and income to the person receiving them.
* There would be no pass through taxation (except single person LLCs and grantor trusts that are simply disregarded for tax purposes).

Exclusions

It might make sense to still exclude insurance proceeds, gifts and inheritances from income with donative transfers taxed in a separate regime that is easier to administer.