Cash vs. accrual method: the section 448(c) gross receipts test for 2026

Reviewed 2026-09-15 · AI-assisted draft and editing; sources and limitations remain visible for independent review.

Answer: Three gates decide this, and they run in order. Gate one: section 448(a) denies the cash receipts and disbursements method only to a C corporation, a partnership that has a C corporation as a partner, and a tax shelter, so many taxpayers never reach the size test at all. Gate two: the exceptions in section 448(b) — a farming business, a qualified personal service corporation, or an entity meeting the gross receipts test — switch off paragraphs (1) and (2) of subsection (a), and only those two. Gate three: the test itself compares average annual gross receipts for the three-taxable-year period ending with the year that precedes the year at issue against a statutory $25,000,000, which section 448(c)(4) indexes for inflation for taxable years beginning after 2018. For taxable years beginning in 2026 the indexed figure is $32,000,000, set by Revenue Procedure 2025-32 at section 4.30. The order matters, because being small does not cure a tax shelter: the gross receipts exception in section 448(b)(3) never reaches subsection (a)(3). Clearing section 448 is also not the finish line. The same gross receipts test controls the inventory exemption in section 471(c) and the capitalization exemption in section 263A(i), and a method already in use cannot simply be abandoned.

Ask Taxterity about your own tax issue

Scope

Jurisdiction: United States — federal

Tax periods: Tax years beginning in 2026, Structure: years beginning after 2017

Assumptions

The question is federal cash-method eligibility for one entity and one taxable year, not which method best reflects the business.
Gross receipts figures used in the test have already been determined under the entity's own accounting records for the three preceding taxable years.

Exclusions

State and local conformity to the federal method.
The aggregation rules of section 448(c)(2), which pull in commonly controlled businesses and can change the measurement entirely.
Farming-specific rules under section 447 and the farming syndicate definition in section 461(k).
The mechanics of changing method once eligibility is lost or gained.

1. Establish the entity before measuring any receipts

Section 448(a) is a prohibition, not a permission. It withholds the cash receipts and disbursements method from a C corporation, from a partnership that has a C corporation as a partner, and from a tax shelter. Nothing in the section tells anyone else that they may use the cash method; other taxpayers reach that question through section 446 instead. So the first research fact is the entity's classification for the year, and for a partnership, the classification of every partner during that year.

The three exceptions in section 448(b) are drafted narrowly and should be read as switches rather than as general relief. A farming business turns off paragraphs (1) and (2) of subsection (a). A qualified personal service corporation turns off the same two paragraphs and, in addition, is treated as an individual when testing whether a partnership has a C corporation partner. An entity meeting the gross receipts test turns off those same two paragraphs. None of the three reaches paragraph (3).

2. Read the gross receipts test the way the statute builds it

Section 448(c)(1) asks whether average annual gross receipts for the three-taxable-year period ending with the taxable year that precedes the year at issue exceed the threshold. Two things follow. The measurement window is a lookback, so the 2026 determination rests on 2023, 2024 and 2025, and the entity's own 2026 results do not enter it. And the test is applied year by year: an entity can satisfy it in one year and fail it in the next without anything about the entity changing except its receipts.

The special rules in section 448(c)(3) fill the obvious gaps. An entity that did not exist for the whole three-year period applies the test over the period it did exist. A taxable year shorter than twelve months is annualized by multiplying its receipts by twelve and dividing by the number of months. Gross receipts are reduced by returns and allowances for the year. A predecessor's history is attributed to the entity. Section 448(c)(2) then aggregates persons treated as a single employer under sections 52(a), 52(b), 414(m) or 414(o), which is the rule most likely to defeat a first-pass conclusion drawn from one entity's own books.

3. The indexed threshold, year by year, and where each figure comes from

The statute still reads $25,000,000. Section 448(c)(4) increases that amount for taxable years beginning after 2018 by a cost-of-living adjustment determined under section 1(f)(3), rounded to the nearest multiple of $1,000,000, so the operative number is always in a revenue procedure and never in the Code. The published figures run as follows: $26,000,000 for years beginning in 2019, 2020 and 2021; $27,000,000 for 2022; $29,000,000 for 2023; $30,000,000 for 2024; and $31,000,000 for 2025. The current List of Automatic Changes records those figures in its small business taxpayer definitions, each attributed to the revenue procedure that set it: the definition at section 12.01 carries the whole run from 2019, while section 15.17, the small business cash method change, begins at 2022.

For taxable years beginning in 2026 the amount is $32,000,000, stated at section 4.30 of Revenue Procedure 2025-32. That document sets 2026 inflation-adjusted items for Code provisions as in effect on October 9, 2025, and it modifies the 2025 inflation procedure to reflect the amendments made by Public Law 119-21 in July 2025. If an amendment is enacted after that date, the procedure itself tells readers to consult later guidance.

One practical warning, because it costs real time. Publication 538 remains at its January 2022 revision and still states the test as $26 million or less. That figure was correct for years beginning in 2021 and is not correct for 2026. Treat the publication as a description of the structure and take the number from the revenue procedure for the year in question.

4. Why a small entity can still be barred

A tax shelter cannot use the cash method no matter how small it is. Section 448(d)(3) borrows the definition in section 461(i)(3), which reaches three things: an enterprise other than a C corporation whose interests were offered in an offering required to be registered with a federal or state securities regulator; any syndicate within the meaning of section 1256(e)(3)(B); and any tax shelter as defined in section 6662(d)(2)(C)(ii).

The syndicate branch is the one that surprises people. Under section 1256(e)(3)(B) a partnership or other entity, other than a corporation that is not an S corporation, is a syndicate if more than 35 percent of its losses for the taxable year are allocable to limited partners or limited entrepreneurs, which places an S corporation inside the definition. A loss year can therefore convert an ordinary small partnership into a tax shelter for that year, and section 1256(e)(3)(C) takes an interest out of that count where it is held by an individual who actively participates at all times in managing the entity, extending the same treatment to that individual's named family members, to a holder who actively participated for at least five years, and to certain estates. This is a year-by-year status test driven by the allocation of losses, not by anyone's intent, so it belongs in the annual file rather than in the entity formation memo.

As a hypothetical for spotting the issue only: a service partnership with modest receipts, several passive limited partners and a single loss year may present the syndicate question even though nobody involved considers the business a shelter. Whether the 35 percent line is crossed depends on the actual allocations and on who actively participates, which this page cannot determine.

5. What clearing the test does and does not carry with it

Satisfying section 448(c) removes a prohibition; it does not by itself establish that the cash method clearly reflects income under section 446(b), and it does not override provisions that mandate a different treatment for particular items. The revenue procedure covering a small business taxpayer's change to the overall cash method says this directly, noting that such a taxpayer may still be required to use another method for specific items under provisions such as sections 475 and 1272. Section 448(d)(7) settles the procedural character of any move made under the section: a change in method of accounting made pursuant to section 448 is treated for purposes of section 481 as initiated by the taxpayer and made with the consent of the Secretary.

The same threshold does a lot of other work. Section 471(c) relieves a taxpayer that meets the section 448(c) gross receipts test, and that is not a tax shelter barred by section 448(a)(3), from the general inventory requirement, and permits inventory to be treated as non-incidental materials and supplies or to follow the taxpayer's applicable financial statement or books and records. Section 263A(i) turns off uniform capitalization for a taxpayer meeting the same test. Conclusions about all three should be dated to the same taxable year and carry the same threshold figure.

6. Write the conclusion so a reviewer can retest it

A defensible eligibility note records six things: the taxable year at issue; the entity classification and, for a partnership, the partner list; whether any section 448(b) exception applies and which one; the three lookback years with their gross receipts after returns and allowances, annualized if short; the aggregation analysis under section 448(c)(2), including the entities considered and rejected; and the tax shelter and syndicate analysis for that year. Cite the threshold to the revenue procedure that set it, not to a secondary summary.

If the conclusion changes the method actually used, the eligibility answer is only half the work. The companion page in this cluster, Form 3115 scoping: automatic changes, non-automatic consent, and section 481(a), covers the filing route and the adjustment; this page stops at eligibility. Ask Taxterity to assemble the section 448 authorities for your entity and year, then verify each citation and the current-year threshold against the revenue procedure before the position is filed.

Related research

Official sources

26 U.S.C. 448 — Limitation on use of cash method of accounting — Subsecs. (a)(1)-(3), (b)(1)-(3), (c)(1)-(4), (d)(3), (d)(7) coordination with section 481; preliminary edition read 2026-09-15, laws in effect on September 14, 2026
26 U.S.C. 461 — General rule for taxable year of deduction — Subsec. (i)(3)(A)-(C), tax shelter defined; preliminary edition read 2026-09-15, laws in effect on September 14, 2026
26 U.S.C. 1256 — Section 1256 contracts marked to market — Subsec. (e)(3)(B) syndicate defined, more than 35 percent of losses; (e)(3)(C) active management
Revenue Procedure 2025-32 — 2026 inflation-adjusted items — Section 4.30 ($32,000,000 for taxable years beginning in 2026); Section 1 purpose, items as in effect October 9, 2025
Revenue Procedure 2025-23 — List of Automatic Changes — Section 12.01 and section 15.17(5) small business taxpayer definitions: indexed section 448(c) amounts for 2019 through 2025; section 15.17(1) on items still governed by other methods
26 U.S.C. 471 — General rule for inventories — Subsec. (c)(1)(A) and (c)(1)(B)(i)-(ii), exemption for certain small businesses
26 U.S.C. 263A — Capitalization and inclusion in inventory costs — Subsec. (i)(1), exemption for certain small businesses keyed to the section 448(c) test
IRS Publication 538 — Accounting Periods and Methods — Gross receipts test and Excluded Entities headings; revision stated as January 2022

Limitations

Code text was read on the U.S. Code preliminary-release pages and checked through Public Law 119-21, enacted July 4, 2025. Those pages show no 2025 amendment to section 448; its most recent amendment note is the 2017 change made by Public Law 115-97. The 2026 threshold comes from a 2025 revenue procedure, which itself states that it reflects the Code as in effect on October 9, 2025 and directs readers to later guidance for amendments after that date.
The aggregation rules of section 448(c)(2) are identified here but not applied. They frequently change the measured receipts and require facts about common ownership and control.
Tax shelter and syndicate status is determined annually from actual loss allocations and active participation. This page describes the test; it does not resolve it for any entity.
Eligibility to use the cash method is not the same as permission to adopt or retain it. Section 446(b) and provisions governing specific items can still require different treatment.