Schedule C - Accounting Method

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:

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 Application for Change in Accounting Method in the TaxAct® program:

  1. From within your TaxAct Online return, click the Tools dropdown, then click Forms Assistant.
  2. Click + next to the Forms and Schedules manila folder (if that section is not already expanded).
  3. Click Form 3115 - Application for Change in Accounting Method: Quick Entry Available
  4. Click + Add to create a new copy of the form, or click Form to edit one that you already created.
  5. Now you can enter your information directly onto the form.

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.

  1. From within your TaxAct Desktop return, click Forms in the options bar to view the Forms Explorer (if it is not already visible).
  2. Click Federal from the dropdown in forms explorer, then click the Forms and Schedules dropdown.
  3. Scroll down and click Form 3115, and the form will appear in Forms View. If you already entered information on this form, the one that appears in Forms View will already have that information.  If you want to create a new form, click + Add New in the new dropdown that appeared below Form 3115 in the Forms Explorer.
  4. Now you can enter your information directly onto the form (click the View form instructions icon at the top of Forms View for more information).

Form 3115 can be e-filed with the return, along with most of the Statement of Explanations associated with this form:

  1. Next to Part I Information For Automatic Change Request in Form 3115, click Attachment(s).
  2. If you are in the desktop program, it will take you to the form in Forms View.
  3. If you are in the online program, you will need to click the Manila Folder that appears, then click + next to the Form 3115 Attachments - Statement of Explanations for Form 3115 manila folder, then click Review next to Application for Change in Accounting Method Attachments

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:

  1. From within your TaxAct return (Online or Desktop), click Federal (on smaller devices, click in the top left corner of your screen, then click Federal).
  2. Click Miscellaneous Topics, then click Additional Information for E-Filing, then click Attachments for E-Filed Returns.
  3. On the screen titled E-Filing - Attachments, click the Checkbox next to Form 3115, Application for Change in Accounting Method.

Additional Information

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.