In general there are two methods of accounting available for use by a business. Below is information on both the "cash method" and "accrual method" of accounting and also on how to change your method of accounting if necessary.

Per IRS Schedule C Instructions, page C-4:

Line F

Generally, you can use the cash method, an accrual method, or any other method permitted by the Internal Revenue Code. In all cases, the method used must clearly reflect income. Unless you are a small business taxpayer (defined later in Part III), you must use an accrual method for sales and purchases of inventory items. Special rules apply to long-term contracts (see section 460 for details).

If you use the cash method, show all items of taxable income actually or constructively received during the year (in cash, property, or services). Income is constructively received when it is credited to your account or set aside for you to use. Also, show amounts actually paid during the year for deductible expenses. However, if the payment of an expenditure creates an asset having a useful life that extends beyond 12 months or the end of the next taxable year, it may not be deductible or may be deductible only in part for the year of the payment. See chapter 1 of Pub. 535.

For amounts includible in income and deductible as expense under an accrual method, see Pub. 538.

To change your accounting method, you generally must file Form 3115. You also may have to make an adjustment to prevent amounts of income or expense from being duplicated or omitted. This is called a section 481(a) adjustment.

To access Form 3115 in the TaxAct® program:

Form 3115 can be electronically filed with the return, along with most of the Statement of Explanations associated with this form. You can access the Statement of Explanations worksheet by clicking on the blue word Attachment(s) appearing on the Form 3115, and then clicking the manila folder icon.

Alternatively, if you need to attach additional documentation, you can do so by mailing Form 8453. Note. The rest of the return can still be e-filed. To indicate this form will be attached and mailed with Form 8453, along with any additional documentation: 

1. Click Federal. On smaller devices, click the menu icon in the upper left-hand corner, then select Federal 
2. Click Miscellaneous Topics in the Federal Quick Q&A Topics menu to expand the category, then click Additional information for E-Filing 
3. Click Attachments for E-Filed Returns 
4. Check the box titled Form 3115, Application for Change in Accounting Method and click Continue

Additional Information

• IRS Publication 535 Business Expenses
• IRS Publication 538 Accounting Periods and Methods