Under the cash method, you report income in the tax year you receive it and deduct expenses in the tax year you pay them. Property and services that you receive are generally included in your income at their fair market value.
Constructive Receipt of Income
The cash method includes the idea of constructive receipt. Income that has been credited to your account or that has been made available to you without restriction is considered to have been constructively received. You do not necessarily need to have actual possession of it.
If you have authorized someone else to receive income for you, you are considered to have constructively received it when the person acting as your agent receives it.
You cannot postpone income from one tax year to the next, for example by holding checks and not depositing them, or not taking possession of money or property in payment, that has been made available to you. On the contrary, income that is subject to substantial restrictions or limitations is not considered to have been constructively received.
Expenses
Even though under the cash method you generally deduct expenses when they are paid, if you pay an expense in advance, the general rule is that you can deduct the expense in the period for which it corresponds. If an expense is paid in advance and covers more than one tax year, you will have to amortize it over the periods covered. But there is also a 12-month rule that states that expenses can be deducted in the year they are paid if the right or benefit generated by the payment does not extend beyond the earlier of 12 months after the date the right or benefit begins, or the end of the following tax year.
Inventory
If your business purchases, produces, or sells merchandise, you will need to keep an inventory and use the accrual method. You generally cannot use the cash method for inventory accounting. You may also be subject to the uniform capitalization rules. These rules apply if you:
produce real or tangible personal property, or
acquire property for resale. But this rule does not apply to personal property if you have annual average gross receipts of $10 million or less.
The uniform capitalization rules require you to capitalize direct and certain indirect costs involved in the production or acquisition of the property. You then recover your capitalized cost through cost of goods sold, or through depreciation or amortization.