I was having a discussion with a client that I took over a couple of years ago, he utilizes QuickBooks for his accounting. His taxes were recorded on a cash basis, and I agreed with this methodology. But QuickBooks is factory set to Accrual Basis, so wen we were discussing numbers there was a difference. So I thought I would post information on Cash Basis just to make sure everyone has an understanding from the IRS’s perspective.
Cash Method
Most individuals and many sole proprietors with no inventory use the cash method because they find it easier to keep cash method records. However, if an inventory is necessary to account for your income, you must generally use an accrual method of accounting for sales and purchases.
Under the cash method, include in your gross income all items of income you actually or constructively receive during your tax year. If you receive property or services, you must include their fair market value in income.
Under the cash method, you include in your gross income all items of income you actually or constructively receive during the tax year. If you receive property and services, you must include their fair market value (FMV) in income.
Income is constructively received when an amount is credited to your account or made available to you without restriction. You need not have possession of it. If you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives it. Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations.
Accrual Method Required
The following businesses, if engaged in farming, must use an accrual method of accounting.
A corporation (other than a family corporation) that had gross receipts of more than $1,000,000 for any tax year beginning after 1975.
A family corporation that had gross receipts of more than $25,000,000 for any tax year beginning after 1985.
A partnership with a corporation as a partner.
A tax shelter