Choosing the Best Accounting Method for Tax Benefits 

What Is an Accounting Method 

This refers to how and when income and expenses are recognized. The IRS requires consistency and accuracy, with the method clearly reflecting business income. Options include: 

• Cash Basis – Records when cash is received or paid 

• Accrual Basis – Records when income is earned or expenses incurred 

• Hybrid – A tailored blend of both methods 

Each method comes with its pros, cons, and eligibility thresholds. Let’s break them down. 

Cash Basis Accounting 

Favored by freelancers and small businesses, cash basis offers simplicity and visibility into cash flow. 

Benefits of the cash method include: 

• Easy to manage 

• Reflects real-time cash availability 

• Enables strategic deferral of income or acceleration of deductions 

However, there are important limitations: 

• Ignores payables and receivables 

• Can distort long-term performance 

• May reduce borrowing credibility 

Eligibility (U.S.): 

 Businesses with under $31M in gross receipts (2025) 

 S-corps and partnerships meeting specific rules 

Eligibility (U.K.): 

 Used by sole traders and simple partnerships 

Accrual Basis Accounting 

Accrual offers a truer financial picture by aligning revenue and expenses with economic activity, not cash flow. 

This method is often chosen because it: 

• Works well for businesses managing inventory or receivables 

• Is required once gross receipts exceed $26M 

• Aligns with GAAP and external stakeholder expectations 

Though it requires more effort, the accrual method supports accurate forecasting and planning. 

Hybrid Accounting Methods 

For businesses that need flexibility, a hybrid approach can offer the best of both worlds. 

Common hybrid strategies include: 

• Using cash basis for expenses and accrual for revenue 

• Tracking inventory or long-term contracts on accrual 

• Keeping operational costs on a cash basis for simplicity 

Keep in mind that hybrid methods often require IRS approval and must be used consistently once adopted. 

Tax Mistakes to Avoid 

Using the wrong accounting method can lead to serious issues with the IRS or HMRC. Here are common pitfalls to watch for: 

• Selecting a method you’re not eligible to use 

• Switching methods mid-year without approval 

• Misreporting income (especially foreign, rental, or investment income) 

• Deducting personal expenses as business costs 

• Filing under incorrect income categories (e.g., self-employment vs. employment) 

Avoiding these issues starts with proper setup and consistent application of your chosen method. 

Changing Your Method 

Switching accounting methods isn’t just a compliance issue—it can be a smart tax move. You might consider changing when: 

• Your business grows rapidly 

• You want more control over cash flow 

• You’re restructuring your deductions for better tax outcomes 

Changes must be justified, documented, and consistently applied going forward. 

IRS Form 3115 Requirements 

In the U.S., any change in accounting method requires IRS Form 3115 to be filed. This form ensures your transition is compliant and that you account for all timing differences in income. 

There are two pathways: 

• Automatic – No fee, commonly used for depreciation updates and standard method changes 

• Non-Automatic – Requires IRS review and a significant fee ($10,800) 
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Tax Strategies by Method 

When used strategically, accounting methods can open the door to valuable tax savings. Examples include: 

• Reclassifying depreciation timelines for cost segregation 

• Deducting repairs instead of capitalizing them 

• Taking advantage of energy-efficiency tax incentives 

• Writing off abandoned or unused assets 

• Electing the cash method to simplify inventory treatment 

Many of these strategies require specialized DCNs (designated change numbers) and expert guidance. 

Section 481 Adjustments 

To prevent double-counting or omissions during a method change, the IRS applies a Section 481(a) adjustment. This ensures consistency in your tax liability before and after the change. 

The adjustment can typically be spread over four years—minimizing the financial impact while keeping you compliant. 

When to Get Professional Help 

Accounting method decisions are foundational. A licensed CPA or tax advisor can: 

• Recommend the optimal method based on your revenue, growth, and industry 

• Navigate IRS eligibility requirements 

• Properly file Form 3115 and document the switch 

• Unlock opportunities using designated change numbers and advanced tax techniques 

Given the complexity, it’s rarely worth going it alone. 

Final Thoughts on Strategic Choice 

Your accounting method isn’t just a back-office detail—it’s a strategic choice. Aligning your method with your operations can enhance: 

• Cash flow control 

• Deduction timing 

• Audit readiness 

• Financial visibility 

Whether you’re just starting or scaling fast, revisiting your method regularly ensures it supports—not hinders—your growth. 

Let Riley CPA Help You Decide 

At Riley CPA, we help businesses of all sizes make confident, informed decisions about their accounting methods and tax strategies. Whether you’re considering a switch or want to ensure you’re using the most beneficial method, our team offers: 

• Personalized evaluations of your current method 

• Expert preparation of IRS Form 3115 

• Strategic tax planning using DCNs and timing adjustments 

• Ongoing support to ensure full compliance and optimization