Which businesses are permitted to use the Cash Method of Accounting” for tax filing purposes?
Generally speaking, the cash method is the most common method that is used by small businesses for tax filing purposes. Per the IRS, “businesses with average gross receipts of $1 million or less and certain businesses with less than $10 million in gross receipts are allowed to use the cash basis.”
In addition, the IRS has allowed the “cash method of accounting for the following businesses as follows;
1. Most farming businesses,
2. Qualified personal service corporations (QPSCs),
3. Any C corporation, other than a personal service corporation, with gross receipts of $5 million or less unless involved in retail, wholesale, mining, manufacturing, printing or sound recording.
But, the IRS has ruled that the cash method may not be used in any situation (except by farming taxpayers) for the following businesses as shown below;
1. Partnerships, with a C corporation partner, where the C corporation had average annual gross receipts for the preceding three years in excess of$5,000,000.
2. "All Tax shelters."
3. C corporations with more than $5,000,000 average annual gross receipts for the three years prior to the current year unless a QPSC.