9049 / Can a taxpayer choose to use both the cash basis and accrual methods of accounting?

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 $25 million in 2018, $26 million in 2019-2021, $27 million in 2022, $29 million in 2023, $30 million in 2024 and $31 million in 2025. See Q 9048.

Under IRC Section 446(c), a taxpayer may use any combination of the permissible accounting methods to compute taxable income if the combination clearly reflects the taxpayer’s income and is consistently used. For example, a taxpayer is permitted to use the cash basis method to account for income and expenses, but the accrual method to account for purchases and sales. Despite this, a taxpayer is not permitted to use one method to account for income and a different method to account for expenses.¹

Though the regulations require that a taxpayer use the accrual method to account for purchases and sales if inventories are maintained (but see Q 9058 for a discussion of the changes to inventory accounting made by the 2017 tax law), that taxpayer may wish to use the cash basis method for income and expenses because the required calculation may be simpler.²

A taxpayer is also permitted to use one accounting method to determine tax liability for income arising from a trade or business and another method to account for income that is not related to a trade or business.³ Taxpayers engaged in different trades or businesses can also use a different method of accounting for each trade or business in which the taxpayer participates.⁴