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Accrual Method: Small-Business Taxes (2025 IRS Guide)

This guide covers “Accrual Method” within small-business taxes. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 334 (2025), Tax Guide for Small Business, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

An accounting method is a set of rules used to determine when and how income and expenses are reported. Your accounting method includes not only the overall method of accounting you use, but also the accounting treatment you use for any material item.

You choose an accounting method for your business when you file your first income tax return that includes a Schedule C (Form 1040) for the business. After that, if you want to change your accounting method, you must generally get IRS approval. See Change in Accounting Method, later.

Accrual Method

Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. The purpose of an accrual method of accounting is to match income and expenses in the correct year.

Income—General Rule

Under an accrual method, you generally include an amount in your gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy. For a taxpayer with an applicable financial statement or other financial statement as the Secretary may specify, the all-events test for an item of gross income is considered met no later than when taken into account in an applicable financial statement or such other financial statement.

Example.

You are a calendar-year accrual method taxpayer. You sold a computer on December 28, 2025. You billed the customer in the first week of January 2026, but you didn’t receive payment until February 2026. You must include the amount received for the computer in your 2025 income.

Income—Special Rules

The following are special rules that apply to advance payments, estimating income, and changing a payment schedule for services.

Estimated income.

If you include a reasonably estimated amount in gross income, and later determine the exact amount is different, take the difference into account in the tax year in which you make the determination.

Change in payment schedule for services.

If you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agree to receive payments at a lower rate until you complete the services and then receive the difference.

Advance payments.

Generally, you report an advance payment as income in the year you receive the payment. However, if you receive an advance payment, you can elect to postpone including the advance payment in income until the next tax year. You can’t postpone including any payment beyond that tax year.

For more information, see Pub. 538 and section 451 of the Internal Revenue Code.

Expenses

Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply.

  1. The all-events test has been met. The test has been met when:

    1. All events have occurred that fix the fact of liability, and

    2. The liability can be determined with reasonable accuracy.

  2. Economic performance has occurred.

Economic performance.

You generally can’t deduct or capitalize a business expense until economic performance occurs. If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. An exception allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. For more information on economic performance, see Economic Performance under Accrual Method in Pub. 538.

Example.

You are a calendar-year taxpayer and use an accrual method of accounting. You buy office supplies in December 2025. You receive the supplies and the bill in December, but you pay the bill in January 2026. You can deduct the expense in 2025 because all events that fix the fact of liability have occurred, the amount of the liability could be reasonably determined, and economic performance occurred in that year.

Your office supplies may qualify as a recurring expense. In that case, you can deduct them in 2025 even if the supplies are not delivered until 2026 (when economic performance occurs).

Keeping inventories.

When the production, purchase, or sale of merchandise is an income-producing factor in your business, you must generally take inventories into account at the beginning and the end of your tax year, unless you are a small business taxpayer. If you must account for an inventory, you must generally use an accrual method of accounting for your purchases and sales. For more information, see Inventories, later.

Special rule for related persons.

You can’t deduct business expenses and interest owed to a related person who uses the cash method of accounting until you make the payment and the corresponding amount is includible in the related person’s gross income. Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. If a deduction is not allowed under this rule, the rule will continue to apply even if your relationship with the person ends before the expense or interest is includible in the gross income of that person.

Related persons include members of your immediate family, including your siblings (either whole or half), spouse, ancestors, and lineal descendants. For a list of other related persons, see section 267 of the Internal Revenue Code.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.

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