Cash vs Accrual Accounting: Which Should Your Small Business Use?
Cash accounting records income when the money arrives and expenses when you pay them; accrual accounting records them when they are earned or incurred. Most small businesses can choose either for taxes, but for tax years beginning in 2026 a C corporation, or a partnership with a C corporation partner, must use accrual once its average annual gross receipts over the prior three years exceed $32 million.
By SF Business Solutions · Our team includes one licensed CPA · 2 sources · Updated September 10, 2026
The difference in one example
Example numbers: a consultant invoices a client $10,000 for December 2026 work and is paid in January 2027. In January she also pays a $2,000 contractor bill for help in December. The same two transactions produce very different 2026 books:
| Item | Cash basis, 2026 | Accrual basis, 2026 |
|---|---|---|
| December invoice, $10,000 | $0 (recorded in January 2027) | $10,000 of income |
| Contractor bill for December, $2,000 | $0 (recorded in January 2027) | $2,000 of expense |
| 2026 profit from these two items | $0 | $8,000 |
Who has to use accrual for taxes
IRS Publication 538 sets out the rule. C corporations, partnerships with a C corporation partner, and tax shelters generally cannot use the cash method. The exception is the gross receipts test: an entity whose average annual gross receipts for the prior three tax years do not exceed the limit can still use cash. For tax years beginning in 2026 that limit is $32 million, up from $31 million for 2025, under Rev. Proc. 2025-32.
S corporations and sole proprietors are not on the restricted list, so most of them can use cash for taxes. Businesses under the gross receipts limit also qualify for simpler rules on inventory. Changing your tax accounting method later means filing Form 3115 with the IRS.
Which to pick
The tax rule sets the floor. Beyond it, choose by what you need the numbers for:
- Cash suits service businesses with few unpaid invoices and bills: it is simple and matches your bank balance.
- Accrual shows real profit month by month, because income and costs land in the month they belong to.
- Lenders and investors usually want accrual statements, and GAAP financial statements are prepared on the accrual basis.
- Businesses with inventory, large receivables or big prepaid costs get a distorted picture on cash.
Keeping books one way and filing another
Many businesses keep management books on accrual so the monthly reports are meaningful, and file taxes on the cash method where they are allowed to. Whoever prepares the return then converts the year-end numbers. It works well as long as receivables and payables are tracked properly all year.
Working with SF Business Solutions
We keep books on the cash or accrual basis in QuickBooks Online or Xero, set up accrual reports when a lender or investor asks for them, and prepare and file your tax return from the same books. Monthly bookkeeping starts at $250 a month, and your books are closed between the 5th and 15th of the following month, depending on when your documents arrive.
Can an LLC use cash accounting?
Usually, yes. A single-member LLC or an LLC taxed as a partnership or S corporation can generally use the cash method; the restriction applies to C corporations and partnerships with a C corporation partner above the gross receipts limit.
What is the gross receipts limit for 2026?
$32 million of average annual gross receipts over the prior three tax years, for tax years beginning in 2026, under Rev. Proc. 2025-32.
Does cash accounting lower my taxes?
It can change when income is taxed, not whether it is. Income you are paid in January is taxed in that year on the cash basis, so the effect is timing.
Can I switch from cash to accrual?
Yes. For your books you can switch at any time; for taxes, a change of accounting method generally needs Form 3115 filed with the IRS.
Which method do lenders want?
Most lenders and investors prefer accrual financial statements, because they show what the business earned and owes, not just what cleared the bank.
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