Accounting Methods

Figure income using the method of accounting regularly used in keeping the corporation’s books and records. The method used must clearly reflect income. Permissible methods include cash, accrual, or any other method authorized by the Internal Revenue Code.

The following rules apply.

• Generally, an S corporation can’t use the cash method of accounting if it’s a tax shelter (as defined in section 448(d)(3)). See section 448 for details.

• A corporation must use an accrual method for sales and purchases of inventory items unless it is a small business taxpayer (defined later). See the Form 1125-A instructions. If you are a small business taxpayer, you can adopt or change your accounting method to account for inventories (i) in the same manner as materials and supplies that are non-incidental or (ii) to conform to the taxpayer’s treatment of inventories in an applicable financial statement (as defined in section 451(b)(3)) or, if the taxpayer doesn’t have an applicable financial statement, the method of accounting used in the taxpayer’s books and records prepared in accordance with the taxpayer’s accounting procedures. Generally, IRS consent is required for changes in accounting methods. See Revenue Procedure 2024-23, I.R.B. 1334, available at IRS.gov/irb/2024-23_IRB#RP-2024-23 for the procedures by which a small business taxpayer may obtain automatic consent to change its method of accounting to reflect the statutory changes made in this area. Also, see Change in accounting method , later.

see the Instructions for Form 3115 for procedures that may apply for obtaining automatic consent to change certain methods of accounting, non-automatic change procedures, and reduced Form 3115 filing requirements.