9048 / Are any taxpayers required to use the accrual method of accounting, rather than the cash basis method?

Editor’s Note: The 2017 tax reform legislation expanded the gross receipts test discussed below to include entities with annual gross receipts that do not exceed $31 million in 2025 ($30 million in 2024 and $29 million in 2023, as indexed for inflation).

Generally, C corporations, partnerships in which a C corporation is a partner and tax shelter arrangements (see Q 8687) are required to use the accrual basis method of accounting.¹

However, several exceptions exist to permit certain C corporations and partnerships with C corporation shareholders to use the cash basis method. Farming businesses² that are organized as C corporations are permitted to use the cash basis method of accounting. Similarly, small businesses organized as C corporations are permitted to use the cash basis method if the corporation (or partnership with C corporation shareholder) has annual gross receipts that do not exceed $31 million (for 2025).³

Planning Point: Revenue Procedure 2018-40 provides the procedures by which small businesses that satisfy the newly expanded gross receipts test can obtain automatic consent to change to the cash basis accounting method for tax years beginning after December 31, 2017. The guidance provides information as to which sections of Form 3115 the taxpayer is required to complete, and also provides that only one Form 3115 must be filed if the taxpayer is making concurrent accounting changes. Further, the guidance provides that it is a modification to previously existing guidance in Revenue Procedures 2015-13 and 2018-31, and that the procedures in those releases will continue to apply unless otherwise noted.

Certain personal service corporations are also permitted to use the cash basis method of accounting. Further, the IRS has specifically determined that the prohibition on C corporations using the cash basis accounting method does not apply to limited liability companies.⁴