Accrual basis

Income counts once all events have fixed your right to receive it, under what is called the all events test. Its amount must also be determinable with reasonable accuracy. The date the cash arrives usually does not decide the year. Advance payments are an exception: they are generally taxed when received, or partly in the next year by election. An expense counts once the liability is fixed, its amount can be determined and economic performance has occurred. For goods or services you buy, that generally happens as they are provided.

For example, a calendar-year business receives office supplies and their bill in December 2026, then pays in January 2027. On the accrual method, it deducts the cost for 2026, the year the supplies and the bill arrived. On the cash method, the deduction waits until 2027.

A C corporation generally must use the accrual method unless it passes a gross receipts test. The same rule applies to a partnership with a C corporation partner. For tax years beginning in 2026, the limit is $32 million of average annual gross receipts for the three prior years. A qualified personal service corporation, such as a consulting firm owned by the consultants it employs, may use the cash method however large its receipts. The cash basis entry covers the other exceptions.

The rule follows tax classification, so a business’s legal form does not settle it. An S corporation is not a C corporation, so it can generally use the cash method. An LLC taxed as a C corporation falls under the rule. So does an LLC taxed as a partnership with a C corporation member, or one that is a tax shelter. Any other LLC is outside the rule.