For the IRS, most small business owners are eligible to file their taxes using the cash basis. This reports your income when you receive it and your expenses when you pay them. This is generally available if the business has gross receipts of $10 million or less (C-Corps are limited to $5 million or less). This is preferred by most small businesses since you don’t report income until you actually receive the cash.
IRS code section 446(a) states that for tax purposes, income must be calculated using the same method that the taxpayer uses to keep their books. You also must be consistent in your use of cash or accrual from year to year. You don’t get to change your mind every year based on which method gets you the lowest income tax liability.
This rule doesn’t stop you from using a different accounting method for your own management use. In fact, it is critical that every business owner review their business on an accrual basis. The accrual method reports income when you invoice it and expenses when you owe them. Managing both accounts receivable and accounts payable is a critical part of the business owner’s job.
Accounting programs such as QuickBooks or Peachtree make it very easy to switch between the two methods.
Like any good CPA, I need to add a disclaimer: Unfortunately, it is impossible to offer comprehensive tax info over the Internet, no matter how well-researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: Before relying on any information given on this site, contact a tax professional to discuss your particular situation.