9044 / What is the cash basis method of accounting?

Editor’s Note: The 2017 tax reform legislation provides that the cash method of accounting can be used by taxpayers that satisfy the gross receipts test regardless of whether the purchase, production or sale of merchandise is an income producing factor. The gross receipts test allows taxpayers with annual average gross receipts that do not exceed $30 million (in 2024) for the three prior tax years (the “gross receipts test”) to use the cash method. The $25 million amount is indexed for inflation beginning after 2018 and was $29 million for 2023.¹

The cash basis method of accounting is the most widely used accounting method for individual taxpayers, and is often used by many business entities, as well.² Cash basis taxpayers recognize all gross income, whether in the form of cash, property or services, in the year that the income is actually or constructively received.³

“Constructive receipt” is considered to have occurred when income is made available to a taxpayer without restrictions.⁴ For example, a cash basis taxpayer cannot avoid reporting income simply because he refused to deposit a check. Conversely, if a taxpayer’s employer provides the taxpayer with a stock bonus, but conditions are imposed so that the bonus is not available to the taxpayer until a future date, the corporation’s reporting such bonus on its books does not constitute constructive receipt on the part of the taxpayer-employee.