One of the questions you must ask for your new business is: what accounting method is best? A mom and pop donut shop would prefer the simpler cash method of accounting as cash rolls in daily. Conversely, a construction firm may benefit from the accrual method as they invoice clients, but may only receive payment in large, periodic amounts.
Stick to the Accounting (Method)
There are a variety of different accounting methods, each with some pros and cons for your business to weigh upon. Newly formed businesses can determine their accounting method for their first tax filing without IRS approval. After that first filing, changing accounting methods requires filing Form 3115. The following are examples of when approval is required and when it is not required from Publication 538 by the Internal Revenue Service:
| Approval Required | Approval NOT required |
| Going from the cash to accrual method | Correction of math, such as an error in figuring tax liability |
| Changing the method of how inventory is valued | Adjusting any item of income or deduction that does not involve the proper time for including it in income or deducting it |
| Changing the depreciation or amortization method | Some adjustments in the useful life of a depreciable or amortizable asset |
Accounting methods and IRS rules to consider may be daunting for a newly minted business owner. Having a supporting team help you navigate those concerns can benefit down the road. Accounting professionals, like us at MiklosCPA, want to share knowledge and guide you through tax questions and accounting needs. We are a California-based accounting and tax firm that utilizes “virtual office” services to help your business succeed. We also post articles like this for clients and interested readers on our website, and on our social media. If you would like to learn more about our services, set up a call with us!