The short answer
Cash basis records income when money arrives and expenses when you pay them. Accrual basis records income when you earn it and expenses when you owe them. Many small businesses can generally use either for taxes, but inventory, entity type and size can limit the choice. Your books can still report both ways. The tax method itself is a decision for your CPA or enrolled agent, and changing it generally needs IRS approval.
Two ways to time the same sale
Say you finish a job on December 20, send the invoice that day, and the customer pays on January 10. On the cash basis, that sale is January income, because that is when the money arrived. On the accrual basis, it is December income, because that is when you earned it. The same split applies to bills: cash basis counts a bill when you pay it, accrual when you owe it.
IRS Publication 538 puts it in tax terms. Under the cash method you generally report income in the year you actually or constructively receive it, and deduct expenses in the year you pay them. Under an accrual method you generally report income in the year it is earned and deduct expenses in the year they are incurred, which matches income and expenses to the same period.
Neither is more honest than the other. They answer different questions. Cash basis tells you what moved through the bank. Accrual tells you what the business earned and owes, whether or not the money has moved yet.
What the IRS generally allows in 2026
Publication 538 says no single method is required of all taxpayers. Whatever you use has to clearly reflect income, and you use the same method from year to year. Within that, a few rules narrow the choice. Which of them applies to you is a question for your CPA or enrolled agent, but it helps to know they exist:
- Some entities generally cannot use cash. C corporations, partnerships with a C corporation as a partner, and tax shelters are excluded from the cash method, unless they meet the gross receipts test (tax shelters cannot use that exception).
- The 2026 gross receipts test. For tax years beginning in 2026, a corporation or partnership meets the test if its average annual gross receipts for the 3 prior tax years were $32,000,000 or less, per IRS Revenue Procedure 2025-32. The same test defines a small business taxpayer for the inventory rules below.
- Inventory. If an inventory is necessary to account for income, purchases and sales generally go on an accrual method. A small business taxpayer can instead treat inventory as non-incidental materials and supplies, or follow the treatment in its books. How that applies to your products is the CPA's call.
- Hybrid methods. A combination of cash and accrual is generally allowed if it clearly reflects income and is used consistently. If you report income on the cash method, you also report expenses on the cash method.
- Separate businesses. Two separate and distinct businesses can use different methods, but only if each keeps a complete and separate set of books.
| If this describes you | Cash basis | Accrual basis |
|---|---|---|
| You are paid on the spot and invoice rarely | Fits well: income follows deposits | Usually more work than the business needs |
| You send invoices or pay bills weeks later | Profit can swing with when customers pay | Shows each month's earned income and costs owed |
| You sell products and carry inventory | Possible for a small business taxpayer under the inventory exception; your CPA decides | Generally required for purchases and sales unless an exception applies |
| A lender, investor or buyer wants statements | May be accepted; ask which basis they want | Often expected; GAAP reporting uses accrual |
| You are a C corporation or have a C corporation partner | Generally only if average gross receipts are $32 million or less (2026) | Always available |
| You collect Idaho sales tax | Books still track sales tax when each sale is made | Matches Idaho's accrual rule for sales tax |
Your reports do not have to match your tax method
The tax return uses one method. Your management reports can use whichever view answers your question. In QuickBooks Online the company setting is in Account and settings, under Advanced, in the Accounting section, and Intuit also lets you switch a single report between cash and accrual to compare the two. Changing that setting changes the reports. It does not change the method on your return, and Intuit's own help page notes that the IRS requires the same method from year to year and its approval before a change.
That flexibility is why many bookkeepers keep invoices and bills entered when they happen, even for a business that files on the cash basis. With those entered, an accrual profit and loss shows how the month really went, and a cash report gives the tax view your CPA works from. Read your financial statements explains how to read either one.
One Idaho rule cuts across the choice. The Idaho State Tax Commission says sales tax is due on the accrual method: you forward the tax with the return for the period you made the sale, even if the customer has not paid yet. So a cash-basis business that collects sales tax still needs its books to track tax on sales when they are made.
What each method asks of the bookkeeping
Cash basis is simpler to keep. Income follows deposits, expenses follow payments, and the bank statement does most of the work. The SBA lists its strengths as showing cash flow clearly and being easier to understand, and its weaknesses as less predictive value and less long-term clarity.
Accrual basis takes more steady work each month. Invoices are entered when sent, bills when received, and at month end someone checks for costs that belong to the month but have not been billed yet, such as wages earned but not paid. The SBA notes that generally accepted accounting principles (GAAP) standardize financial reporting using the accrual method, though private companies are not required to follow GAAP. Lenders, investors and buyers often ask which basis your statements use, so it is worth knowing before they ask.
Some things work the same way under both. Equipment purchases go on the balance sheet as assets, loan principal reduces the loan balance rather than counting as an expense, and owner draws are never expenses.
Choosing, and changing later
Publication 538 says you choose a method when you file your first return, without IRS approval. After that, changing from cash to accrual or back is a change in accounting method that generally needs IRS approval, usually requested on Form 3115. A corporation or partnership that stops meeting the gross receipts test must change to an accrual method and file Form 3115. That is CPA or enrolled agent work, not a bookkeeping setting.
The bookkeeping side is simpler: agree which basis the books and reports use, write it into the scope, and keep the records so either view is available. A small business bookkeeping scope of work shows where that belongs in writing. If you would rather keep the books in-house, in-house vs. outsourced bookkeeping compares the options honestly.
Danielson Bookkeeping's small business bookkeeping keeps books and reports on the basis you and your CPA agree on, and QuickBooks services can set the file up to report either way. Choosing the tax method stays with your CPA or enrolled agent.
