Publication 538 - Accounting Periods And Methods
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18Contents
Publication 538
(Rev. April 2001)
Introduction . . . . . . . . . . . . . . . . . . . . . 1
Cat. No. 15068G
Department
User Fees . . . . . . . . . . . . . . . . . . . . . . 2
of the
Accounting
Treasury
Accounting Periods
Calendar Year . . . . . . . . . . . . . . . . . 2
Internal
Fiscal Year . . . . . . . . . . . . . . . . . . . 2
Revenue
Periods and
Short Tax Year . . . . . . . . . . . . . . . . 2
Service
Improper Tax Year . . . . . . . . . . . . . . 3
Change in Tax Year . . . . . . . . . . . . . 3
Methods
Partnerships, S Corporations,
and Personal Service
Corporations . . . . . . . . . . . . . . . 4
Corporations . . . . . . . . . . . . . . . . . . 7
Accounting Methods
For tax years ending on or after December 31, 2001, a qualifying
!
Cash Method . . . . . . . . . . . . . . . . . . 8
small business taxpayer can choose to use the cash method of
Accrual Method . . . . . . . . . . . . . . . . 9
accounting and not account for inventories. A qualifying small
CAUTION
Inventories . . . . . . . . . . . . . . . . . . . 12
business taxpayer is any taxpayer with average annual gross receipts of
Change in Accounting Method . . . . . . 15
more than $1,000,000 but less than or equal to $10,000,000 that is not
prohibited from using the cash method of accounting under section 448 of
How To Get Tax Help . . . . . . . . . . . . . . 16
the Internal Revenue Code. Certain other requirements must be met. For
more information, see Notice 2001 – 76 in Internal Revenue Bulletin
Index . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2001 – 52.
Introduction
Each taxpayer (business or individual) must fig-
ure taxable income on an annual accounting
period called a tax year. The calendar year is the
most common tax year. Other tax years are a
fiscal year and a short tax year.
Each taxpayer must also use a consistent
accounting method, which is a set of rules for
determining how and when to report income and
expenses. The most commonly used account-
ing methods are the cash method and an ac-
crual method. Under the cash method, you
generally report income in the tax year you re-
ceive it and deduct expenses in the tax year you
pay them. Under an accrual method, you gener-
ally report income in the tax year you earn it,
regardless of when payment is received, and
deduct expenses in the tax year you incur them,
regardless of when payment is made.
This publication explains some of the rules
for accounting periods and accounting methods.
In many cases, however, you may have to refer
to the cited sources for a fuller explanation of the
topic. Section references are to the Internal Rev-
enue Code and regulation references are to the
Income Tax Regulations.
This publication is not intended as a guide to
general business and tax accounting rules.
Comments and suggestions. We welcome
your comments about this publication and your
suggestions for future editions.
You can e-mail us while visiting our web site
at
You can write to us at the following address:
Internal Revenue Service
Technical Publications Branch
W:CAR:MP:FP:P
1111 Constitution Ave. NW
Washington, DC 20224
We respond to many letters by telephone.
Therefore, it would be helpful if you would in-
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