Cash Basis Accounting
Authority: IRC §446(c)(1); §448
Cash basis accounting recognizes income when payment is actually or constructively received and deducts expenses when they are paid. It is the method most small businesses use because it is simple, matches the bank account, and gives real timing control at year-end: delaying December invoices pushes income into next year, while prepaying deductible expenses (within the 12-month rule) pulls deductions into this year. Most businesses with average annual gross receipts under an inflation-indexed threshold (around $30 million) may use the cash method, including those carrying inventory, which can be treated as non-incidental materials and supplies. C corporations above the threshold and certain tax shelters must use accrual. Constructive receipt is the main trap: income is taxable when it is available without restriction, so leaving a December check uncashed or an invoice unwithdrawn in a payment platform does not defer it.
Example
A cash basis agency finishes a $50,000 project in December but, by agreement, invoices in January. The income lands in the new tax year. Meanwhile it prepays January's $8,000 rent in December and deducts it this year.
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