There are two main methods of accounting available for a business to use. Below is information on the "cash method", the "accrual method", and how to change your method of accounting.
Per IRS Instructions for Schedule C (Form 1040) Profit or Loss From Business, starting on page C-3:
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 Application for Change in Accounting Method in the TaxAct® program:
Note. If you see a message that says "Upgrade required. Click the add button to upgrade and use this form.", then you will need to complete the steps to upgrade to a version of TaxAct that supports filing this form after you click + Add.
Form 3115 can be e-filed with the return, along with most of the Statement of Explanations associated with this form:
Alternatively, if you need to attach additional documentation, you can do so by mailing Form 8453 U.S. Individual Income Tax Transmittal for an IRS e-file Return. 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:
Note that any link in the information above is updated each year automatically and will take you to the most recent version of the webpage or document at the time it is accessed.