Businesses May Benefit From Revenue Procedure 2002-28

Since 2002, Revenue Procedure 2002-28 expanded the number of businesses permitted to use the cash method of accounting rather than being required to use the accrual method.

The accrual method requires income to be reported in the year it is earned without regard to when payment is received. Consequently, taxes could be owed on income for which no payment has actually been received.

For example, under the accrual method, income earned in December 2013 (assuming a calendar year) would be included in 2013 gross income and subject to taxes for that year even if payment was not received until 2014.

On the other hand, under the cash method, income is only reported in the year it is actually (or constructively) received regardless of when it was earned.

Therefore, under the cash method, income earned in December 2013 but not actually received until 2014, would be included in 2014 income and not 2013. For example, if you perform a service in December 2013 and get paid January 2014, you would not have to report the income until the April 15, 2015 filing deadline, plus extensions.

Depending on the amount of taxes deferred, the extra cash in your bank account could potentially be used to reduce debt, purchase inventory, replace equipment, or to increase your cash cushion in case of emergencies.

Businesses that stand to benefit from the accrual method exception under Revenue Procedure 2002-28 include:

  • Service businesses.
  • Service businesses, where the service is the principal activity and merchandise related to the service may be sold.
    • For example, a pool service that also sells pool supplies out of a retail store
  • Service businesses that must use materials and supplies in the performance of the service.
    • For example, a medical service provider that provides drugs to treat illnesses, a roofing contractor that uses materials and supplies to install roofing.
  • Custom manufacturing (other than mass production manufacturing).

File your personal and small business taxes (Schedule C)