Excite Tax's answer for Utah owners: cash, for most. IRC §448(c) lets a business averaging up to $32 million in gross receipts use it in 2026; lenders may still want accrual.
Excite Tax's answer: the cash method, unless something outside the tax return needs accrual. Most individuals and many small businesses use cash, and a corporation or partnership stays eligible while its 3-year average gross receipts are $32,000,000 or less for 2026. Choose accrual when a lender, investor or buyer wants statements that match income to the month it was earned. The full test is below.
Timing, nothing else. On the cash basis, income counts when the money arrives and expenses when they are paid. On the accrual basis, income counts when it is earned and expenses when they are incurred, whether or not cash has moved. Over the life of a business the totals are the same; the year each dollar lands in is not. A side-by-side example is below.
Only if the invoice was counted as income first. An unpaid fee is deductible as a bad debt only when the income it represents was already on a return, so a cash-method business generally has no bad-debt deduction for an unpaid invoice: it never paid tax on the money. An accrual business that booked the sale can deduct it in the year the debt becomes worthless. How to record both is below.
In the books, as a liability (customer deposits or unearned revenue) until the work is done, then as income. For tax, an advance payment is generally income in the year it is received; an accrual business can elect to push the unearned part to the next tax year, and no further. The entries and an example are below.
Yes, with the IRS's consent. The method is chosen on the first return, and changing it later generally needs IRS approval, which is requested on Form 3115. A corporation or partnership that outgrows the gross receipts test must change to accrual for that year. More below.
Both methods count the same sales and the same bills. They disagree about which month, and which tax year, each one belongs to.
Cash basis and accrual basis side by side (IRS Publication 538, cash method; accrual method)
| Cash basis | Accrual basis | |
|---|---|---|
| A sale counts | When the money is actually or constructively received | When the right to the money is fixed and the amount is known |
| A bill counts | When it is paid | When it is incurred |
| Unpaid invoices | Not income, so not a bad debt either | Income when earned; deductible when the debt becomes worthless |
| Customer deposits | Income when received | Income when received, or deferred one tax year by election |
| What the books show | What the bank shows | What was earned and owed, including receivables and payables |
Cash is simpler to keep and to read: the profit on the books is close to the change in the bank balance. Accrual is harder to keep but tells the truth about a month: a big job finished in March shows as March income, even if the customer pays in May. The catch on the cash side is that the timing is not a free choice. Holding checks does not postpone the income; it is reported in the year the payment is received or made available.
The federal limit is aimed at larger businesses. Under IRC § 448(a), a C corporation, a partnership with a C corporation as a partner, and a tax shelter may not use the cash method, unless the corporation or partnership meets the gross receipts test. A sole proprietor, a single-member LLC and an S corporation are not on that list, which is why most individuals and many small businesses use cash.
The test itself: for tax years beginning in 2026, a corporation or partnership passes if its average annual gross receipts for the 3 prior tax years do not exceed $32,000,000. The average is the 3 prior years' gross receipts added together and divided by 3, and a business that has not existed that long averages over the years it has. The limit is adjusted for inflation each year, so the figure on this page is tied to its tax year.
Excite Tax's example: a Lehi software company taxed as a C corporation averages its gross receipts for the 3 prior years: $24 million, $30 million and $36 million in 2023, 2024 and 2025. Added together and divided by 3, that is a $30 million average, under the $32,000,000 limit for 2026, so it may stay on cash for 2026. If 2026 brings $40 million, the 2024 to 2026 average is $35.3 million, well over the 2026 limit; unless the 2027 inflation adjustment closes that gap, the company must change to accrual for 2027, because a corporation that fails the gross receipts test must change to an accrual method for that year.
Excite Tax's example: a Provo landscaping company invoices $8,000 of December work, earned in December. Customers pay $5,000 in December and $3,000 in January, and on the cash method income counts in the year it is received. A $1,200 supplier bill for December's materials arrives on December 20 and is paid on January 10, the year it counts on the cash method.
December profit, cash basis vs accrual basis (cash method; accrual method)
| December | Cash basis | Accrual basis |
|---|---|---|
| Income | $5,000 received | $8,000 earned |
| Supplier bill | $0 (paid in January) | $1,200 incurred |
| December profit (cash or accrual) | $5,000 | $6,800 |
| Moves into January | The $3,000 of income and the $1,200 bill, counted when received and paid | Nothing; the cash just settles the receivable and payable |
Across December and January both methods report the same $6,800 of profit, earned in December; only the split between the two tax years changes. On the cash basis, $1,800 of that profit falls into the next tax year, because a cash-method business reports its expenses on the cash method too. That shift is why cash usually suits a growing business with receivables: tax follows the money in the bank.
Whether an unpaid invoice can be written off for tax depends entirely on the method. IRC § 166 allows a deduction for a debt that becomes worthless during the tax year, but an unpaid fee counts as a bad debt only if the income it represents was already included on a return.
Excite Tax's example: a $2,500 invoice from 2025 is still unpaid in 2026 and the customer has closed the business, so the debt became worthless in 2026, and a debt that becomes worthless during the year is deductible. A cash-basis business never reported the $2,500, so it has no bad-debt deduction; its tax already reflects the loss. An accrual-basis business reported the $2,500 as 2025 income, so it deducts $2,500 in 2026, the year the debt became worthless. The costs of doing the job, such as materials and wages, were deductible on either method when they were paid or incurred.
A deposit is money for work not yet done. In the books, record it as a liability, usually called customer deposits or unearned revenue: debit the bank, credit the liability. When the work is delivered, move it: debit the liability, credit income. That keeps monthly profit honest on either method and shows how much work the business still owes.
Tax timing is separate from the bookkeeping entry. An advance payment is generally income in the year it is received, and on the cash basis that is the end of it. Under IRC § 451(c), an accrual business may instead elect to include the part not yet earned in the following tax year. For a business without an applicable financial statement, the regulation at 26 CFR § 1.451-8 includes the part earned in the year of receipt and the rest in the next tax year. Once made, the election applies to every later year unless the IRS consents to revoke it.
Excite Tax's example: in October 2026 a St. George wedding photographer takes a $1,500 deposit for a June 2027 wedding, an advance payment for services. On the cash basis, the $1,500 is 2026 income, income in the year it is received, even though the books carry it as a liability until June. On the accrual basis with the deferral election, none of it is earned in 2026, so all $1,500 moves to 2027, the next tax year. A deposit taken in 2026 for a wedding in 2028 still cannot be postponed past 2027: the election reaches the next year, and no later.
A refundable security deposit that the business must hold and return is different from a payment for work. Ask before booking one as income.
Inventory is the usual reason a small business meets accrual. A business that must account for an inventory must use an accrual method for its purchases and sales, but a small business taxpayer under the same inflation-indexed gross receipts test can choose not to keep an inventory, as long as its method still clearly reflects income. A Utah retail shop or online store under the limit can often stay on cash; one over it cannot.
Long jobs are the other. Income from a long-term contract is generally figured under the percentage of completion method, but a residential construction contract, or a construction contract expected to finish within 2 years by a contractor that meets the gross receipts test, is exempt. How that plays out for Utah contractors is in construction bookkeeping.
The first return sets the method: changing it later generally needs IRS approval, requested on Form 3115. A corporation or partnership that fails the gross receipts test must change to accrual effective for that year. Choosing well at the start is cheaper than a change of method later.
Books can still be read both ways. Most bookkeeping software runs a profit and loss report on either basis from the same entries, as long as invoices and bills are entered when they happen, not only when they are paid. Books kept that way answer a lender's accrual request without rebuilding the year.
For how each method changes the month-end routine, see the month-end close checklist; for where the method sits in the wider split between bookkeeping and accounting, see bookkeeping vs accounting. Books that were kept on a mix of both need sorting out before either method means anything: fix messy books.
Hand it over once the books are closed and the return is the next step, or sooner if a deadline is inside a month.
Excite Tax prepares this; a licensed CPA at TBD CPA LLC reviews and signs the return.
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