Cash method
Income is recognized when received; expenses are deducted when paid. Year-end timing decisions (delay invoicing into next year, prepay January expenses in December) directly shift taxable income between years. The default for sole proprietors and most small businesses.
Accrual method
Income is recognized when earned (right to receive fixed and amount determinable); expenses are deducted when the liability is fixed and economic performance has occurred. Better matches revenue and expenses for management reporting; required for some businesses with inventory or above the gross-receipts threshold.
Small-business cash exception
Businesses with average annual gross receipts under the inflation-adjusted threshold ($30M in 2024) may use the cash method even if they have inventory or would otherwise be required to use accrual. The TCJA expansion of the small-business exception was a major simplification for product businesses.
When accrual is required
C-corporations and partnerships with C-corp partners (other than personal service corps and farms) above the threshold must use accrual. Tax shelters must use accrual. Some industries (banking) have method-specific rules.
Changing methods
Changing accounting methods requires Form 3115. Many common changes — including switching to cash method under the small-business exception — are automatic-consent changes. The cumulative effect of the change is a Section 481(a) adjustment, spread over four years (income) or recognized immediately (deduction).
How experienced filers approach this
Experienced self-employed filers and the CPAs who advise them treat this question as a recurring planning exercise rather than a one-time decision. They model the multi-year tax impact rather than just the current year, document the reasoning in a short workpaper that survives staff turnover and software changes, and revisit the analysis annually as facts and laws change. The discipline is not difficult — a half-day in January with last year's return, the current-year IRS publications, and a spreadsheet — but it is rare among DIY filers, which is precisely why it produces outsized results.
Common mistakes worth avoiding
The recurring mistakes filers make on this topic cluster in three patterns: (1) optimizing for current-year tax at the expense of multi-year tax, (2) treating the choice as binary when the IRS framework actually allows nuance (partial elections, hybrid methods, year-by-year reassessments), and (3) deferring the analysis until the return is due rather than running it during the year when the result can still influence behavior. A short annual review — even thirty minutes — catches all three failure modes and replaces vague intuition with documented reasoning.