Am I allowed to use cash basis?

Many small US businesses may, but eligibility depends on entity type, revenue level and whether you carry inventory. The rules have thresholds that change, so confirm against current IRS guidance for your specific situation rather than assuming.

Can I use cash for tax and accrual for management?

Yes, and plenty of businesses do. Your management accounts can run on accrual so you can see the real position, while the tax return uses whichever method you have properly adopted. Changing your tax method later generally requires IRS consent.

When do I have to switch?

When you exceed the revenue thresholds, when you start carrying inventory, or when investors or a lender require accrual statements. The practical trigger is usually the first serious diligence request rather than a tax rule.

Bookkeeping and accounting for founders

Guide · 1 min read

Cash vs accrual accounting: which you should use

Cash is simpler and fine for a service business paid on receipt. The moment you invoice on terms or hold stock, it starts lying to you.

The short answer

Cash accounting records revenue when payment arrives and expenses when paid. Accrual records revenue when earned and expenses when incurred. Cash is simpler and available to many small US businesses for tax, but accrual gives a truer picture once you invoice on terms or hold inventory.

	Cash basis	Accrual basis
Revenue recorded	When money arrives	When you earn it
Expenses recorded	When you pay	When you incur the obligation
Complexity	Low	Higher
Shows real profitability	Poorly if you invoice on terms	Yes
Investors expect	No	Yes
Typical fit	Services paid on receipt	Inventory, terms, outside capital

Why cash basis misleads

If you invoice on 30-day terms, cash accounting reports a wonderful month whenever several clients happen to pay together, and a terrible one whenever they do not. Neither number tells you anything about how the business performed in that month.

For a business that holds stock the distortion is worse: buying inventory looks like a catastrophic month, and selling it looks like a windfall, when in reality the margin was steady throughout.

For how to structure the underlying records, see bookkeeping.

Frequently asked questions

Am I allowed to use cash basis?: Many small US businesses may, but eligibility depends on entity type, revenue level and whether you carry inventory. The rules have thresholds that change, so confirm against current IRS guidance for your specific situation rather than assuming.
Can I use cash for tax and accrual for management?: Yes, and plenty of businesses do. Your management accounts can run on accrual so you can see the real position, while the tax return uses whichever method you have properly adopted. Changing your tax method later generally requires IRS consent.
When do I have to switch?: When you exceed the revenue thresholds, when you start carrying inventory, or when investors or a lender require accrual statements. The practical trigger is usually the first serious diligence request rather than a tax rule.

Sources

IRS — Publication 538, Accounting Periods and Methods

Last reviewed August 23, 2026. Verify against the primary source before acting.

Founders 8 does not provide tax advice. Tax residency depends on facts and rules specific to each jurisdiction — review your position with a qualified adviser.

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