Choosing between the cash and accrual methods of accounting can significantly impact your business’s tax obligations and cash flow. While many small businesses qualify for the cash method—especially after the Tax Cuts and Jobs Act (TCJA) expanded eligibility—some businesses may still benefit more from the accrual method.
What Changed Under the TCJA?
The TCJA simplified the definition of a “small business” by increasing the gross receipts threshold to $25 million (adjusted for inflation). In 2025, that threshold is $31 million, giving more businesses the flexibility to choose between methods. Small businesses may also qualify for additional tax advantages, including simplified inventory rules and exemption from interest deduction limitations.
Cash vs. Accrual: Key Differences
The cash method allows income and expenses to be recognized when money changes hands, offering more control over tax timing and potentially better cash flow. The accrual method, on the other hand, recognizes income when earned and expenses when incurred—making it useful for businesses with large receivables or accrued expenses.
Is a Switch Right for You?
Switching accounting methods requires a strategic look at your business’s finances. Companies using GAAP for financial reporting, for instance, must use the accrual method—though they can still use the cash method for taxes, if approved by the IRS. Dual reporting can be complex but worthwhile if tax savings are significant.
To determine what’s best for your business, consult with a qualified advisor. Contact Verity CPAs at info@verity.cpa or 808.546.5026 to review your accounting method and maximize tax advantages.