Deducting Prepaid Expenses

Per reg 1.263(a)-4(f)(7), you can elect not to have the 12-month rule apply. But once you elect for a particular item, are you bound as an accounting method for that item? I do not think so but thought I would confirm.

An example is prepaid insurance. Assume for 12/31/07 there is prepaid insurance which expires 6/30/08 for $10,000, and taxpayer capitalizes it for books, and elects not to deduct the $10,000 for tax purposes either. At 12/31/08, there is prepaid insurance of $12,000 which expires 6/30/09. I think I can still deduct the $12,000 on the 2008 calendar year tax return even though it is capitalized for books.

Twelve month rule exception:

Since the proposed transfer will be in lieu of paying the 2003 rent and will not create a benefit in excess of 12 months after the current year, the exception to the general rule will not apply. Therefore, if you are a cash method taxpayer, you would be entitled to a rent deduction equal to the entire value of the realty in the year the property is transferred to Mr. Smith.
If you have adopted the accrual method of accounting for federal income tax purposes, the proper year for claiming a rental deduction is the year in which you occupy the property to which the rent payment relates. Since your proposed transfer of the 10 acres will be in lieu of payment of rent for 2003, you would be entitled to a rental deduction equal to the value of the 10 acres only on your 2003 federal income tax return if you are an accrual method taxpayer.

PPC 15L 15-16

Cash-basis taxpayers are not required to capitalize expenses that create any right or benefit that expires on or before the earlier of (1) 12 months after the first date on which the taxpayer realizes the right or benefit or (2) the end of the tax year following the year the payment was made. Taxpayers can elect, however, not to apply this 12 month rule. In that case, prepaid expenses are capitalized and amortized.

How to elect: the election is made by treating the amounts as capital expenditures on a timely filed original tax return for the year the amounts are paid.

Exception to the twelve month rule exception:

Exception to the exception to the twelve month rule exception:

Exception to the exception to the exception to the twelve month rule exception:

In U.S. Freightways Corp. [88 AFTR 2d 2001-6703 (6th Cir. 2001), rev'd and rem'd 113 TC 329 (1999)], the Seventh Circuit reversed the Tax Court's decision and allowed an accrual-bases taxpayer to currently deduct licenses, fees, and insurance premiums benefiting a 12-month period that extended into the next tax year. The Seventh Circuit adopted a one-year rule that allows both cash-and accrual-bases taxpayers to immediately deduct fixed, one-year recurring expenses that benefit the next taxable year. The IRS argued against a one-year rule, but later announced plans to issue proposed regulations that would allow taxpayers to immediately deduct prepaid items that satisfy a 12-month rule (Ann. 2002-9, 2002-7 IRB 536). The proposed regulation will allow taxpayers to immediately deduct prepaid expenses whose benefit does not extend beyond the earlier of 12 months after the taxpayer starts realizing the benefit from teh expenditure or the end of the taxable year following the year of payment.

Since USFreightways could not prove that sections 162 and 263 sanction deductibility of the expenses, the court did not even address the issue of whether the company’s accounting method clearly reflected its income. Its conclusion was broad enough to apply to all accrual-method taxpayers and all expenditures whose benefits extend beyond the end of the current tax year. Accrual-method taxpayers must capitalize all expenditures that provide a substantial benefit beyond yearend. The fact that the expenses are recurring is immaterial. Likewise, there is no 12-month rule for accrual-method taxpayers.

The first exception is the so-called “3 ½ month rule” in § 1.461-4(d)(6)(ii). That rule provides that a taxpayer is permitted to treat services or property as provided to the taxpayer (i.e., as economic performance) as the taxpayer makes payment to the person providing the services or property if the taxpayer can reasonably expect the person to provide the services or property within 3 ½ months after the date of payment

Unlike the deferred compensation rule, the 3 ½ month rule is an “all or nothing” rule with respect to a particular liability. Therefore, the 3 ½ month rule does not apply to allow a deduction in year 1 for a prepayment made at the end of year 1 for services to be performed in the first 3 ½ months of year 2 under a contract that extends beyond that 3 ½ month period

Property taxes generally accrue at some specific point in time when the tax becomes a lien on the property, personal liability for the tax arises, or some other definite event occurs. Economic performance, moreover, does not occur until the tax is paid. However, if a special election is made by an accrual method taxpayer, the taxpayer may deduct real property taxes ratably over the period to which the tax relates.

§461(c). See Regs. §1.461-1(c)(3)(ii) (Requiring that a taxpayer submit a written request for permission to make the election within 90 days after the beginning of the taxable year to which the election first applies); Rev. Proc. 2005-63, 2005-36 I.R.B. 491 (Providing a waiver of the 90-day requirement and procedures for eligible taxpayers to follow); Rev. Proc. 2007-56, 2007-34 I.R.B. 388 (Due date for election may be further extended for taxpayers affected by a Presidentially declared disaster or terroristic or military action (§7508A) and is extended for taxpayers serving in, or in support of, the Armed Forces in an area designated by the President as a combat zone or serving with respect to a contingency operation §7508)). See ¶2340 for further discussion of the election.

Tr month rule exception:

While the rules for deducting prepaid farm expenses have not changed, the IRS is taking a closer look at the deduction in recent audits. This material discusses the general rules that make the expenses eligible for a current deduction.

Farm producers who use the cash method of accounting are allowed to deduct the cost of supplies purchased during the year even if the supplies will not be used until the following year if they meet the requirements of two sets of rules.

One set of rules comes from case law and IRS rulings. The general rule is stated in Grynberg v. Commissioner, 83 T.C. 255 (1984), and is applied to feed expenses in Rev. Rul. 79-229 1979-2 C.B. 210. This rule requires the producer to meet the following three conditions to claim a deduction in the year of the expenditure:

2. The prepayment must be made for a business purpose and not merely for tax avoidance.

The other set of rules is set out in I.R.C. §464(f). Those rules limit a taxpayer’s deduction for prepaid expenses to 50% of deductible expenses other than the prepaid expenses unless the taxpayer is a “qualified farm related taxpayer.” A “farm related taxpayer” is any taxpayer:

To be “qualified,” the farm related taxpayer must meet one of the following two requirements:

Example 1. Patty Producer uses the cash method of accounting. In December 2000, she paid $20,000 to Supply Cooperative for fertilizer to be applied in the spring of 2001 on her corn crop. Patty’s deductible expenses for 2000 other than this purchase of fertilizer was $100,000. She purchased the fertilizer in December for two reasons. First, she was offered a discount for purchasing in December rather than the following spring. Second, she was concerned that fertilizer may be difficult to buy at any price the following spring. Patty is allowed to deduct the $20,000 she paid for the fertilizer on her 2000 income tax return. She meets the three requirements of the general rule. I.R.C. §464(f) does not limit her deduction for two reasons. First, she is a qualified farm related taxpayer, so the 50% limit does not apply to her. Second, she has not exceeded the 50% limit.

After purchasing supplies for the following year, a producer’s plans may change. He or she may decide not to produce the crop or raise the livestock for which the supply was purchased. Such producers must address the tax consequences of that change in plans.

Example 2. Assume the same facts as in Example 1, except that the price of corn dropped dramatically before Patty planted her crop and the cost of fertilizer increased significantly. Consequently, Patty decided to sell the fertilizer she had purchased and plant an alternative crop that does not require fertilizer. She found a buyer that paid her $25,000 for the fertilizer.

Deduction on 2000 Tax Return. A potential consequence of Patty’s change in plans is a denial of the $20,000 deduction on her 2000 income tax return.

In Rev. Rul. 82-208, 1982-2 C.B. 58, the prepayment rules were applied to a payment of estimated state income taxes on December 31, 1981. The IRS noted that estimated state income taxes are deductible in the year they are paid if the amount of the payment is reasonably determined in good faith at the time of the payment. In that ruling, the IRS held that the taxpayer had no reasonable basis to believe that he owed any additional state income taxes and did not allow the estimated payment to be deducted on the 1981 income tax return.

Applying the principle of Rev. Rul. 82-208 to the facts in Example 2, the IRS is not likely to challenge Patty’s deduction of the $20,000 on her 2000 income tax return. At the time she made the payment, she in good faith thought that she would use the fertilizer on her 2001 corn crop.

Income on 2001 Tax Return. The sale of the fertilizer in 2001 results in taxable income for 2001. Since Patty deducted the cost on the fertilizer on her 2000 income tax return, she has a zero basis in the fertilizer. Therefore, Patty must report the full $25,000 that she received for the fertilizer on her 2001 income tax return. The other income line of Schedule F (line 10 on the 2001 Schedule F) is the logical place to report this income since it was neither purchased for resale (Schedule F, line 1) nor raised (Schedule F, line 4).

The same tax consequences are likely to follow from the purchase and sale of other farm supplies so long as there is a good faith expectation the supply will be used in the farm business when it is purchased and there is a genuine change in plans that results in a sale of the supply. The following supplies are likely to qualify for the above tax consequences for the reasons listed with each supply.

If the supplies are returned to the seller for a credit, the taxpayer must be careful to not trigger the deposit rule. If the supply is returned to the seller for a credit equal to the original amount paid, the original transaction could appear to be a deposit rather than a purchase. The taxpayer should document the negotiations that result in a credit for the taxpayer.

Example 3. Assume the same facts as in Example 2, and in addition assume that Patty sells the fertilizer back to Supply Cooperative and receives cash for the sale. These facts do not jeopardize Patty’s argument that the original purchase was a purchase and not a deposit.

If Patty received a credit from Supply Cooperative that could only be used to purchase other supplies from the cooperative, the IRS could argue that her original payment was a deposit and not a purchase. However, since Patty negotiated a different price for the fertilizer, she can show that she faced the risk of a price change. Therefore, she is likely to prevail on her argument that the original payment was a purchase.

If Patty received a credit from Supply Cooperative that is exactly equal to her original purchase price, it is more difficult for her to show that her original payment was not a deposit. She should document her negotiations with Supply Cooperative so that she can prove that she faced the risk of a price change and that the credit was the same as the original purchase price only because the value of the fertilizer when she returned it was the same as the cost of the fertilizer when she purchased it.

Sec. 461. General Rule For Taxable Year Of Deduction

461(a) General Rule
The amount of any deduction or credit allowed by this subtitle shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income.

461(b) Special Rule In Case Of Death
In the case of the death of a taxpayer whose taxable income is computed under an accrual method of accounting, any amount accrued as a deduction or credit only by reason of the death of the taxpayer shall not be allowed in computing taxable income for the period in which falls the date of the taxpayer's death.

461(c) Accrual Of Real Property Taxes
461(c)(1) In General
If the taxable income is computed under an accrual method of accounting, then, at the election of the taxpayer, any real property tax which is related to a definite period of time shall be accrued ratably over that period.
461(c)(2) When Election May Be Made
461(c)(2)(A) Without Consent
A taxpayer may, without the consent of the Secretary, make an election under this subsection for his first taxable year in which he incurs real property taxes. Such an election shall be made not later than the time prescribed by law for filing the return for such year (including extensions thereof).
461(c)(2)(B) With Consent
A taxpayer may, with the consent of the Secretary, make an election under this subsection at any time.
461(d) Limitation On Acceleration Of Accrual Of Taxes

461(d)(1) General Rule
In the case of a taxpayer whose taxable income is computed under an accrual method of accounting, to the extent that the time for accruing taxes is earlier than it would be but for any action of any taxing jurisdiction taken after December 31, 1960, then, under regulations prescribed by the Secretary, such taxes shall be treated as accruing at the time they would have accrued but for such action by such taxing jurisdiction.
461(d)(2) Limitation
Under regulations prescribed by the Secretary, paragraph (1) shall be inapplicable to any item of tax to the extent that its application would (but for this paragraph) prevent all persons (including successors in interest) from ever taking such item into account.

461(e) Dividends Or Interest Paid On Certain Deposits Or Withdrawable Accounts
Except as provided in regulations prescribed by the Secretary, amounts paid to, or credited to the accounts of, depositors or holders of accounts as dividends or interest on their deposits or withdrawable accounts (if such amounts paid or credited are withdrawable on demand subject only to customary notice to withdraw) by a mutual savings bank not having capital stock represented by shares, a domestic building and loan association, or a cooperative bank shall not be allowed as a deduction for the taxable year to the extent such amounts are paid or credited for periods representing more than 12 months. Any such amount not allowed as a deduction as the result of the application of the preceding sentence shall be allowed as a deduction for such other taxable year as the Secretary determines to be consistent with the preceding sentence.
461(f) Contested Liabilities
If--
461(f)(1) the taxpayer contests an asserted liability,
461(f)(2) the taxpayer transfers money or other property to provide for the satisfaction of the asserted liability,
461(f)(3) the contest with respect to the asserted liability exists after the time of the transfer, and
461(f)(4) but for the fact that the asserted liability is contested, a deduction would be allowed for the taxable year of the transfer (or for an earlier taxable year) determined after application of subsection (h), then the deduction shall be allowed for the taxable year of the transfer. This subsection shall not apply in respect of the deduction for income, war profits, and excess profits taxes imposed by the authority of any foreign country or possession of the United States.

461(g) Prepaid Interest
461(g)(1) In General
If the taxable income of the taxpayer is computed under the cash receipts and disbursements method of accounting, interest paid by the taxpayer which, under regulations prescribed by the Secretary, is properly allocable to any period--
461(g)(1)(A) with respect to which the interest represents a charge for the use or forbearance of money, and
461(g)(1)(B) which is after the close of the taxable year in which paid, shall be charged to capital account and shall be treated as paid in the period to which so allocable.
461(g)(2) Exception
This subsection shall not apply to points paid in respect of any indebtedness incurred in connection with the purchase or improvement of, and secured by, the principal residence of the taxpayer to the extent that, under regulations prescribed by the Secretary, such payment of points is an established business practice in the area in which such indebtedness is incurred, and the amount of such payment does not exceed the amount generally charged in such area.

461(h) Certain Liabilities Not Incurred Before Economic Performance
461(h)(1) In General
For purposes of this title, in determining whether an amount has been incurred with respect to any item during any taxable year, the all events test shall not be treated as met any earlier than when economic performance with respect to such item occurs.

461(h)(2) Time When Economic Performance Occurs
Except as provided in regulations prescribed by the Secretary, the time when economic performance occurs shall be determined under the following principles:
461(h)(2)(A) Services And Property Provided To The Taxpayer
If the liability of the taxpayer arises out of--
461(h)(2)(A)(i) the providing of services to the taxpayer by another person, economic performance occurs as such person provides such services,
461(h)(2)(A)(ii) the providing of property to the taxpayer by another person, economic performance occurs as the person provides such property, or
461(h)(2)(A)(iii) the use of property by the taxpayer, economic performance occurs as the taxpayer uses such property.
461(h)(2)(B) Services And Property Provided By The Taxpayer
If the liability of the taxpayer requires the taxpayer to provide property or services, economic performance occurs as the taxpayer provides such property or services.
461(h)(2)(C) Workers Compensation And Tort Liabilities Of The Taxpayer
If the liability of the taxpayer requires a payment to another person and--
461(h)(2)(C)(i) arises under any workers compensation act, or
461(h)(2)(C)(ii) arises out of any tort, economic performance occurs as the payments to such person are made. Subparagraphs (A) and (B) shall not apply to any liability described in the preceding sentence.
461(h)(2)(D) Other Items
In the case of any other liability of the taxpayer, economic performance occurs at the time determined under regulations prescribed by the Secretary.

461(h)(3) Exception For Certain Recurring Items
461(h)(3)(A) In General
Notwithstanding paragraph (1) an item shall be treated as incurred during any taxable year if--
461(h)(3)(A)(i) the all events test with respect to such item is met during such taxable year (determined without regard to paragraph (1)),
461(h)(3)(A)(ii) economic performance with respect to such item occurs within the shorter of--
461(h)(3)(A)(ii)(I) a reasonable period after the close of such taxable year, or
461(h)(3)(A)(ii)(II) 8-1/2 months after the close of such taxable year,
461(h)(3)(A)(iii) such item is recurring in nature and the taxpayer consistently treats items of such kind as incurred in the taxable year in which the requirements of clause (i) are met, and
461(h)(3)(A)(iv) either--
461(h)(3)(A)(iv)(I) such item is not a material item, or
461(h)(3)(A)(iv)(II) the accrual of such item in the taxable year in which the requirements of clause (i) are met results in a more proper match against income than accruing such item in the taxable year in which economic performance occurs.
461(h)(3)(B) Financial Statements Considered Under Subparagraph (A)(iv)
In making a determination under subparagraph (A)(iv), the treatment of such item on financial statements shall be taken into account.
461(h)(3)(C) Paragraph Not To Apply To Workers Compensation And Tort Liabilities
This paragraph shall not apply to any item described in subparagraph (C) of paragraph (2).

461(h)(4) All Events Test
For purposes of this subsection, the all events test is met with respect to any item if all events have occurred which determine the fact of liability and the amount of such liability can be determined with reasonable accuracy.

461(h)(5) Subsection Not To Apply To Certain Items
This subsection shall not apply to any item for which a deduction is allowable under a provision of this title which specifically provides for a deduction for a reserve for estimated expenses.

461(i) Special Rules For Tax Shelters
461(i)(1) Recurring Item Exception Not To Apply
In the case of a tax shelter, economic performance shall be determined without regard to paragraph (3) of subsection (h).
461(i)(2) Special Rule For Spudding Of Oil Or Gas Wells
461(i)(2)(A) In General
In the case of a tax shelter, economic performance with respect to amounts paid during the taxable year for drilling an oil or gas well shall be treated as having occurred within a taxable year if drilling of the well commences before the close of the 90th day after the close of the taxable year.
461(i)(2)(B) Deduction Limited To Cash Basis
461(i)(2)(B)(i) Tax Shelter Partnerships
In the case of a tax shelter which is a partnership, in applying section 704(d) to a deduction or loss for any taxable year attributable to an item which is deductible by reason of subparagraph (A), the term "cash basis" shall be substituted for the term "adjusted basis".
461(i)(2)(B)(ii) Other Tax Shelters
Under regulations prescribed by the Secretary, in the case of a tax shelter other than a partnership, the aggregate amount of the deductions allowable by reason of subparagraph (A) for any taxable year shall be limited in a manner similar to the limitation under clause (i).
461(i)(2)(C) Cash Basis Defined
For purposes of subparagraph (B), a partner's cash basis in a partnership shall be equal to the adjusted basis of such partner's interest in the partnership, determined without regard to--
461(i)(2)(C)(i) any liability of the partnership, and
461(i)(2)(C)(ii) any amount borrowed by the partner with respect to such partnership which--
461(i)(2)(C)(ii)(I) was arranged by the partnership or by any person who participated in the organization, sale, or management of the partnership (or any person related to such person within the meaning of section 465(b)(3)(C)), or
461(i)(2)(C)(ii)(II) was secured by any asset of the partnership.
461(i)(3) Tax Shelter Defined
For purposes of this subsection, the term "tax shelter" means--
461(i)(3)(A) any enterprise (other than a C corporation) if at any time interests in such enterprise have been offered for sale in any offering required to be registered with any Federal or State agency having the authority to regulate the offering of securities for sale,
461(i)(3)(B) any syndicate (within the meaning of section 1256(e)(3)(B)), and
461(i)(3)(C) any tax shelter (as defined in section 6662(d)(2)(C)(ii)).
461(i)(4) Special Rules For Farming
In the case of the trade or business of farming (as defined in section 464(e)), in determining whether an entity is a tax shelter, the definition of farming syndicate in section 464(c) shall be substituted for subparagraphs (A) and (B) of paragraph (3).
461(i)(5) Economic Performance
For purposes of this subsection, the term "economic performance" has the meaning given such term by subsection (h).

461(j) Limitation On Excess Farm Losses Of Certain Taxpayers
[Editor's Note: Section 15351(a) of Pub. L. 110-246 added subsec. (j) effective for taxable years beginning after December 31, 2009.]
461(j)(1) Limitation
If a taxpayer other than a C corporation receives any applicable subsidy for any taxable year, any excess farm loss of the taxpayer for the taxable year shall not be allowed.
461(j)(2) Disallowed Loss Carried To Next Taxable Year
Any loss which is disallowed under paragraph (1) shall be treated as a deduction of the taxpayer attributable to farming businesses in the next taxable year.
461(j)(3) Applicable Subsidy
For purposes of this subsection, the term "applicable subsidy" means--
461(j)(3)(A) any direct or counter-cyclical payment under title I of the Food, Conservation, and Energy Act of 2008, or any payment elected to be received in lieu of any such payment, or
461(j)(3)(B) any Commodity Credit Corporation loan.
461(j)(4) Excess Farm Loss
For purposes of this subsection--
461(j)(4)(A) In General
The term "excess farm loss" means the excess of--
461(j)(4)(A)(i) the aggregate deductions of the taxpayer for the taxable year which are attributable to farming businesses of such taxpayer (determined without regard to whether or not such deductions are disallowed for such taxable year under paragraph (1)), over
461(j)(4)(A)(ii) the sum of--
461(j)(4)(A)(ii)(I) the aggregate gross income or gain of such taxpayer for the taxable year which is attributable to such farming businesses, plus
461(j)(4)(A)(ii)(II) the threshold amount for the taxable year.
461(j)(4)(B) Threshold Amount
461(j)(4)(B)(i) In General
The term "threshold amount" means, with respect to any taxable year, the greater of
461(j)(4)(B)(i)(I) $300,000 ($150,000 in the case of married individuals filing separately), or
461(j)(4)(B)(i)(II) the excess (if any) of the aggregate amounts described in subparagraph (A)(ii)(I) for the 5-consecutive taxable year period preceding the taxable year over the aggregate amounts described in subparagraph (A)(i) for such period.
461(j)(4)(B)(ii) Special Rules For Determining Aggregate Amounts
For purposes of clause (i)(II)--
461(j)(4)(B)(ii)(I) notwithstanding the disregard in subparagraph (A)(i) of any disallowance under paragraph (1), in the case of any loss which is carried forward under paragraph (2) from any taxable year, such loss (or any portion thereof) shall be taken into account for the first taxable year in which a deduction for such loss (or portion) is not disallowed by reason of this subsection, and
461(j)(4)(B)(ii)(II) the Secretary shall prescribe rules for the computation of the aggregate amounts described in such clause in cases where the filing status of the taxpayer is not the same for the taxable year and each of the taxable years in the period described in such clause.
461(j)(4)(C) Farming Business
461(j)(4)(C)(i) In General
The term "farming business" has the meaning given such term in section 263A(e)(4).
461(j)(4)(C)(ii) Certain Trades And Businesses Included
If, without regard to this clause, a taxpayer is engaged in a farming business with respect to any agricultural or horticultural commodity--
461(j)(4)(C)(ii)(I) the term "farming business" shall include any trade or business of the taxpayer of the processing of such commodity (without regard to whether the processing is incidental to the growing, raising, or harvesting of such commodity), and
461(j)(4)(C)(ii)(II) if the taxpayer is a member of a cooperative to which subchapter T applies, any trade or business of the cooperative described in subclause (I) shall be treated as the trade or business of the taxpayer.
461(j)(4)(D) Certain Losses Disregarded
For purposes of subparagraph (A)(i), there shall not be taken into account any deduction for any loss arising by reason of fire, storm, or other casualty, or by reason of disease or drought, involving any farming business.
461(j)(5) Application Of Subsection In Case Of Partnerships And S Corporations
In the case of a partnership or S corporation--
461(j)(5)(A) this subsection shall be applied at the partner or shareholder level, and
461(j)(5)(B) each partner's or shareholder's proportionate share of the items of income, gain, or deduction of the partnership or S corporation for any taxable year from farming businesses attributable to the partnership or S corporation, and of any applicable subsidies received by the partnership or S corporation during the taxable year, shall be taken into account by the partner or shareholder in applying this subsection to the taxable year of such partner or shareholder with or within which the taxable year of the partnership or S corporation ends.
The Secretary may provide rules for the application of this paragraph to any other pass-thru entity to the extent necessary to carry out the provisions of this subsection.
461(j)(6) Additional Reporting
The Secretary may prescribe such additional reporting requirements as the Secretary determines appropriate to carry out the purposes of this subsection.
461(j)(7) Coordination With Section 469
This subsection shall be applied before the application of section 469.
(Aug. 16, 1954, ch. 736, 68A Stat. 157; Sept. 14, 1960, Pub. L. 86-781, Sec. 6(a), 74 Stat. 1020; Oct. 24, 1962, Pub. L. 87-876, Sec. 3(a), 76 Stat. 1199; Feb. 26, 1964, Pub. L. 88-272, title II, Sec. 223(a)(1), 78 Stat. 76; Oct. 4, 1976, Pub. L. 94-455, title II, Sec. 208(a), title XIX, Sec. 1901(a)(69), 1906(b)(13)(A), 90 Stat. 1541, 1775, 1834; July 18, 1984, Pub. L. 98-369, div. A, title I, Sec. 91(a), (e), 98 Stat. 598, 607; Oct. 22, 1986, Pub. L. 99-514, title VIII, Sec. 801(b), 805(c)(5), 823(b)(1), title XVIII, Sec. 1807(a)(1), (2), 100 Stat. 2347, 2362, 2374, 2811; Dec. 22, 1987, Pub. L. 100-203, title X, Sec. 10201(b)(5), 101 Stat. 1330-387; Nov. 10, 1988, Pub. L. 100-647, title I, Sec. 1008(a)(3), 1018(u)(5), 102 Stat. 3436, 3590; Dec. 19, 1989, Pub. L. 101-239, title VII, Sec. 7721(c)(10), 103 Stat. 2400; Nov. 5, 1990, Pub. L. 101-508, title XI, Sec. 11704(a)(5), 104 Stat. 1388-518; Aug. 20, 1996, Pub. L. 104-188, Sec. 1704, 110 Stat. 1755; Dec. 21, 2005, Pub. L. 109-135, title IV, Sec. 412(aa), 119 Stat. 2577; Pub. L. 110-246, title XV, Sec. 15351(a), June 18, 2008, 122 Stat. 1651.)

There are many special rules and exemptions dealing with all sorts of unique circumstances, so you should check with your income tax advisor before applying any of these general rules to your own situation.

Cash Receipts and Cash Disbursements method of accounting

Accrual method of accounting