Cash vs. Accrual Method of Accounting

When forming a new business it is important to determine whether the cash or accrual method of accounting should be used for bookkeeping and tax purposes. Generally any business structure can choose to use the accrual method, however there are limitations on who can use the cash method of accounting.

According to section 448 of the Internal Revenue Code, C corporations, partnerships that have a C corporation as a partner, and tax shelters are not permitted to use the cash method of accounting. The following are exceptions to this general rule: farming businesses, qualified personal service corporations, and entities that have gross receipts of $5,000,000 or less. These businesses are permitted to choose between the cash or accrual method of accounting.

Our office would be happy to assist you with any questions you may have on this subject. Please refer to the website’s homepage for our phone number and office hours.