Taxpayers Prohibited from Using the Cash Method

The following taxpayers are prohibited from using the cash method:

1. If your business's average annual gross receipts exceed for the prior three years exceed $10 million.

2. C corporations and partnerships with C corporations as a partner with average annual gross receipts exceeding $5 million at any time after 1985.

3. Tax Shelters may not use the cash method.

4. Tax-exempt trusts with unrelated business income.

5. Principal business activities prohibited in Revenue Procedure 2002-28:

  • Retail trade: NAICS Code: 44-45
  • Wholesale trade: NAICS Code: 42
  • Manufacturing: NAICS Code: 31-33
  • Mining activity: NAICS Code: 211-212
  • Information industries: NAICS Code: 5111-5122

NAICS codes:

You determine your principal business activity by reference to the North American Industry Classification System (NAICS) code published by the Department of Commerce (

Principal Business Activity:

The Principal activity of a business refers to the business activity that produces the largest percentage of gross receipts in the prior year or the largest average percentage over the three prior years.

QuickBooks Self-Employed
For Freelancers and independent Contractors

- Organize your financial data into one central accounting system on the cloud
- Software kept up to date.
- Your data kept secure
- Anytime, anywhere data access.
- Pay your quarterly estimated taxes online.
- Export Schedule C to TurboTax at year-end for faster filing.
- Save up to 50% off QuickBooks Self-Employed. Track every deduction! Start your free trial now!

Have an accounting or bookkeeping question? Email it to me.