An accounting method is a method used for reporting income and expenses on a federal income tax return. There are two main types of accounting methods and a taxpayer must use the same accounting method every tax season. If a taxpayer wishes to change the accounting method, they must seek permission from the Internal Revenue Service. Here are the accounting methods for federal income tax returns.
Choosing the accounting method on Schedule C
Schedule C, Profit or Loss From Business is pretty much a mandatory tax form for businesses. When filling out Schedule C, you’ll need to state your accounting method on Line F. You can choose either cash or accrual or other. While other isn’t really going to be an option for most businesses, you’ll need to pick either one.
Although the accounting method for the overwhelming majority of businesses is cash, it’s always good to know which accounting method you’re using to report income and expenses.
The accrual method is the method of reporting income as soon as possible, including when you earn the income, the date you received the payment, the date title passes to you, and when the income is due to you. Report the income as soon as you earn and the expenses are counted to the year they’re accumulated. An example of an accrual accounting method is when you make an expense in a tax year – let’s say 2023 – but you didn’t pay until the start of 2024, you can write off the expense in 2023 rather than the actual time the payment takes place.
The cash method is by far the most popular means of reporting income. In the cash accounting method, you will report gross income earned at the time of receiving it and report expenses that are paid during the tax year. So, all of your income and expenses are reported based on the transactions that happen during the tax year.
An example of a cash method accounting is when you earn income and have an expense and report them for the transactions within the same tax year.
Changing the accounting method
There isn’t a set number of times you can change accounting methods but how often is the question. You can change accounting methods any time after the first year it was changed. If you changed the accounting method for the 2023 tax year, you can change it again in 2023, and 2024, and so on. There isn’t a limit on how many times you can change the accounting method, but you must wait for the tax year to end. File Form 3115 to change the accounting method but do it as soon as you can, preferably way before the new tax year starts.