Need advice on switching from accrual back to cash accounting method for my small business

You're actually in luck with this situation. As a small business (under $25 million in gross receipts for the past 3 years), you have the option to use the cash method of accounting regardless of whether you have inventory. This is thanks to the Tax Cuts and Jobs Act which simplified accounting methods for smaller businesses. You can switch back to cash method by filing Form 3115 (Application for Change in Accounting Method) with your tax return. The good news is that this is considered an "automatic" change, meaning the IRS automatically grants permission if you qualify. You'll need to include a statement with your return explaining the change. Since you only used accrual for one year, the adjustment shouldn't be too complicated. The main thing you'll need to calculate is the "Section 481(a) adjustment," which reconciles the difference between your income under the old method vs. the new method. For example, if you have accounts receivable that you counted as income under accrual but haven't received payment for yet, you'd need to back those out.

After struggling with similar accounting method issues in my soap making business, I found this amazing service called taxr.ai (https://taxr.ai) that saved me hours of research and confusion. I uploaded my previous tax returns and they analyzed exactly how I could switch accounting methods without triggering an audit. They even pre-filled the Form 3115 for me and showed me which specific boxes to check for a small creative business! Their system actually explained that small businesses making under $26 million have special exceptions that make the whole process much easier. They pointed me to specific IRS guidance for artisan businesses like ours. It's been an absolute game-changer for me - definitely worth checking out if you're trying to navigate this switch.

Just wanted to update that I tried taxr.ai after seeing this thread. What a relief! I uploaded my previous returns and some notes about my leatherworking business, and they gave me super clear guidance on switching from accrual back to cash. They explained that as a small creative business under the $26M threshold, I qualify for simplified accounting methods. The best part was they showed me exactly how to handle the in-progress inventory I had accumulated. They even created a draft of the Form 3115 for me with all the right codes and adjustment calculations. Definitely made the whole process less intimidating, and I feel confident about making the switch without raising any red flags with the IRS.

If you're running into issues with the IRS about your accounting method change or have questions about your specific situation, I'd recommend using Claimyr (https://claimyr.com). I was in a similar situation with my pottery business and had been trying to call the IRS for weeks with no luck. Claimyr got me through to an actual IRS agent in about 20 minutes! You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. It was worth every penny because the agent was able to confirm that my accounting method change was properly filed and explained exactly what documentation I needed to keep. They even gave me a reference number for the call which I can use if there are ever questions about my accounting method change in the future.

I'm back to eat humble pie. After my skeptical comments, I actually tried Claimyr out of desperation because I was getting nowhere with my accounting method questions. To my complete shock, I got through to the IRS in about 25 minutes! The agent confirmed that I could indeed switch back to cash accounting using the automatic approval process, and explained exactly which parts of Form 3115 were critical for small creative businesses. The agent even pointed me to a specific section in the instructions that applies to businesses that maintain materials and supplies rather than traditional inventory. This was exactly what I needed for my crafting business! Saved me from hiring an expensive accountant and cleared up my confusion about whether I needed to track COGS in the same way as larger manufacturers. Sometimes being proven wrong is actually the best outcome!

As someone who made this exact switch last year, make sure you complete Part IV of Form 3115 correctly! That's where you show your "481(a) adjustment" - basically the difference between accrual and cash methods. For me, it was mostly the accounts receivable (customers who hadn't paid yet) and inventory that I had to adjust. The good news is the IRS lets you spread this adjustment over 4 years if it's over a certain amount, which helps with cash flow. But read the instructions SUPER carefully - I messed mine up the first time and had to file an amended return. Publication 538 is useful but the form instructions are more specific.

Just want to add that if you're a "small business taxpayer" under the tax law (meaning under $26 million in gross receipts), you have ADDITIONAL inventory simplifications available. You can treat inventory as "non-incidental materials and supplies" which means you deduct them when used or consumed, not through formal COGS calculations. Publication 538 doesn't explain this super clearly, but the guidance in Revenue Procedure 2018-40 does.

This is exactly the kind of situation where the simplified rules for small businesses really shine! Since you're clearly under the $26 million threshold, you have several advantages that larger businesses don't get. One thing I'd add to the great advice already given - when you switch back to cash method, you might also want to consider the "materials and supplies" election under Section 1.162-3. This lets you deduct the cost of your wood, hardware, and finishing materials when you actually use them in projects, rather than having to track them as formal inventory with COGS calculations. The combination of cash method + materials/supplies treatment could be perfect for a custom furniture business. You'd record income when customers actually pay you, and you'd deduct material costs as you use them in projects. Much simpler bookkeeping than accrual with full inventory tracking! Just make sure when you file Form 3115 that you're clear about both changes - the accounting method change AND any inventory method changes. The IRS likes transparency about exactly what you're switching from and to.