Understanding how your business reports income for tax purposes is crucial to optimizing cash flow and minimizing tax liabilities. Businesses typically use either the cash method or the accrual method of accounting:
For many businesses, the cash method provides significant advantages, as it offers greater flexibility in managing tax liabilities.
The Tax Cuts and Jobs Act (TCJA) and Expanded Eligibility
The Tax Cuts and Jobs Act (TCJA) of 2018 expanded the number of businesses eligible to use the cash method of accounting. Before the TCJA, only businesses with average revenues under $5 million could use this method. However, the new law increased the threshold to $25 million (indexed for inflation, reaching $31 million in 2025).
Who Benefits the Most from the Cash Method?
Businesses that have significantly higher accounts receivable than accounts payable can benefit the most from switching to the cash method. If your business collects payments long after making sales but pays vendors quickly, this method can help delay tax liabilities and improve cash flow.
Despite these benefits, many businesses have yet to take advantage of this change. Even seven years after the TCJA, businesses earning under $31 million may still be using the accrual method and missing out on potential tax savings. If your business qualifies, consulting with a Certified Public Accounting (CPA) professional can help determine whether switching accounting methods can reduce your tax burden.
How Can CPAs and Forensic Accountants Help?
CPAs and forensic accountants play a crucial role in analyzing your financial situation, determining the best accounting method, and ensuring compliance with IRS regulations. They help businesses identify potential tax savings, optimize financial strategies, and navigate the complexities of tax law changes. Partnering with a CPA can provide valuable insights and maximize your business’s tax efficiency.
