Cash Versus Accrual Method
The following examples compare the cash and accrual methods of accounting.
Example 1. You are a farmer who uses an accrual method of
accounting. You keep your books on the calendar tax year basis. You sell grain in December
2002, but you are not paid until January 2003. You must include both the sale proceeds and
deduct the costs incurred in producing the grain on your 2002 tax return.
Example 2. Assume the same facts as in Example 1 except
that you use the cash method and there was no constructive receipt of the sale proceeds in
2002. Under this method, you include the sale proceeds in income for 2003, the year you
receive payment. You deduct the costs of producing the grain in the year you pay for them.
Special Methods
of Accounting
There are special methods of accounting for certain items of income and expense.
Crop method. If you do not
harvest and dispose of your crop in the same tax year that you plant it, you can, with IRS
approval, use the crop method of accounting. Under this method, you deduct the
entire cost of producing the crop, including the expense of seed or young plants, in the
year you realize income from the crop.
You cannot use this method for timber or any commodity subject to the uniform
capitalization rules.
Other special methods. Other special methods of accounting apply to
the following items.
- Amortization, see chapter 8.
- Casualties, see chapter 13.
- Condemnations, see chapter 13.
- Depletion, see chapter 8.
- Depreciation, see chapter 8.
- Farm business expenses, see chapter 5.
- Farm income, see chapter 4.
- Installment sales, see chapter 12.
- Soil and water conservation expenses, see chapter 6.
- Thefts, see chapter 13.
Combination Method
You can generally use any combination of cash, accrual, and special methods of
accounting if the combination clearly shows your income and expenses and you use it
consistently. However, the following restrictions apply.
- If you use the cash method for figuring your income, you must use the cash method for
reporting your expenses.
- If you use an accrual method for reporting your expenses, you must use an accrual method
for figuring your income.
Change in
Accounting Method
Once you have set up your accounting method, you must generally get
IRS approval before you can change to another method. A change in your accounting
method includes a change in:
- Your overall method, such as from cash to an accrual method, and
- Your treatment of any material item, such as a change in your method of valuing
inventory (for example, a change from the farm-price method to the unit-livestock-price
method).
To get approval, you must file Form 3115.
You may have to pay a fee. For more information, see the Form 3115 instructions.
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