Should your business be on the cash method or the accrual method? The cash method is the simplest. However, many taxpayers are not allowed to use the cash method.
The accrual method is a more accurate measure of a business operating performance. This method reports income when it is earned and expenses are reported when they are incurred (in the period to which they apply). This is and can be much different than the cash method, which reports income very simply when it is received and reports expenses when they are paid.
Here are some guidelines. However, always contact us for your specific situation:
** $l Million or less – Businesses with average annual receipts of $1 million or less are allowed to use the cash method.
** Qualified Personal Service Corporations are allowed to use the cash method.
** $10 Million or less – Businesses primarily engaged in providing a service and with average annual receipts of $10 million or less are allowed to use the cash method.
** Certain entities just can’t use the cash method.
** Businesses (manufacturing, wholesale, distribution, retailing (businesses with inventories)) are required to be accrual method where average annual receipts exceed $1 million.