New Rule Allows More Cash Accounting

A number of entrepreneurs will find good news in a recently issued IRS procedure allowing certain businesses with gross receipts of up to $10 million to use the cash method of accounting for income and expenses rather than the accrual method.

When companies use the cash method, income is taxable when received, and expenses are deductible when paid. With the accrual method, transactions are taxable or deductible when incurred. While the proposed change is welcomed by a number of entrepreneurs, it will not apply as broadly as some might think, says Dennis J. Tepe, CPA and tax partner with accounting firm Jackson, Rolfes, Spurgeon & Co. in Dayton, Ohio. For example, manufacturers, wholesalers, retailers, miners, and certain publishers and sound recorders aren't allowed to use the cash method of accounting, according to the IRS, unless they are principally a service business or perform certain kinds of custom manufacturing.