Cash basis

Income you have not withdrawn can still count as received. It is constructively received once it is credited to your account or made available for you to draw on. It does not count while your access to it is subject to substantial limits or restrictions. Interest your bank credits in December is generally income for that year, even if you leave it there. Payment in property or services counts as income too.

Three kinds of taxpayers are barred from the cash method: C corporations, partnerships with a C corporation partner, and tax shelters. The corporations and partnerships can still use it in any year they pass a gross receipts test. A qualified personal service corporation can use it at any size, and farming businesses follow separate rules. No test or exemption lets a tax shelter use it. A barred corporation or partnership that fails the test must generally switch to accrual for that year. Changing methods needs the IRS’s consent, which usually means filing Form 3115.

For tax years beginning in 2026, a business passes the test if its average annual gross receipts are $32 million or less. The average covers the three tax years before the year being tested. Businesses under common control count their receipts together. A company less than three years old averages the years it has existed. The statute’s $25 million base rises with inflation each year, so older sources show lower limits.

Inventory brings rules of its own for when costs count, and a small business taxpayer can use simpler ones. Paying a bill does not always bring an immediate deduction, even on the cash method. The cost of equipment, and prepaid costs that cover later years, may be deducted over several years instead.