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

I've been running my custom goods business for about 6 years now, and I'm having some accounting method confusion. For the first 5 years, I was using the cash method of accounting which seemed straightforward enough. But last year, for some reason I convinced myself I was doing it all wrong, so I switched to accrual method and started tracking inventory and calculating COGS for all my purchases that year. Now I'm looking into better ways to handle my COGS, and I've stumbled across several sources saying that COGS might not even be necessary for my type of business? I was reading through Publication 538 (page 13) which seems to suggest this, but I got confused halfway through. Has anyone else made the switch between cash and accrual accounting methods? Is it even worth tracking inventory and COGS for a small custom goods business like mine? I'm starting to think I should just go back to cash method since it was simpler, but I don't want to mess up my taxes. Any advice would be appreciated!

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18 comments

Ella Thompson

•8M

I work with small businesses on their accounting methods, and this is actually a common area of confusion. For small businesses like yours that make custom goods, you generally qualify for simplified accounting methods under the Tax Cuts and Jobs Act. If your average annual gross receipts for the past 3 tax years are under $27 million, you're considered a "small business" and can use the cash method regardless of whether you produce, purchase, or sell merchandise. The law greatly expanded the number of businesses that can use cash accounting, which is typically much simpler to maintain. Regarding inventory and COGS - if you qualify as a small business, you can choose to either: 1) treat inventory as non-incidental materials and supplies, or 2) conform to your financial accounting treatment. Either way, you don't need the complex inventory accounting systems that larger businesses use.

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Ella Thompson

•8M

Yes, you can absolutely switch back to the cash method since you're well under the $27 million threshold. You'll need to file Form 3115 (Application for Change in Accounting Method) with your tax return. This lets the IRS know you're making the change. For a small business like yours with $180k in revenue, the cash method is typically much simpler to maintain. When you switch methods, you'll calculate a "section 481(a) adjustment" which prevents income or expenses from being counted twice or omitted. It's basically a one-time adjustment that transitions between methods.

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JacksonHarris

•8M

After struggling with accounting method confusion similar to yours, I found an AI tool that actually helped me make sense of all this stuff. I had switched back and forth between cash and accrual for my pottery business and was totally lost when trying to sort out the tax implications. I uploaded my accounting records and business info to https://taxr.ai and it analyzed everything and clearly explained which method would work best for my specific situation. It even generated a custom report showing the difference in my tax liability between methods and explained how to properly document the change with the IRS. The tool also explained the inventory/COGS requirements in plain English - turns out I was overcomplicating things for years and could have saved so much time with the simplified method.

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JacksonHarris

•8M

It absolutely explained everything clearly - they break down complex tax concepts into simple language. I uploaded my previous returns and some basic info, and it showed me step-by-step what to do for my specific situation. Regarding Form 3115, that's actually where it was most helpful. It identified exactly which parts of the form applied to my business and which sections I could skip. It even generated a draft of the required statement explaining my accounting method change that I could customize and attach to my return. The tool seems to understand all the small business exemptions and simplified method requirements.

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Jeremiah Brown

•8M

I was in the exact same boat as you! After seeing this thread, I decided to try https://taxr.ai before making any decisions about switching accounting methods. Literally was the best decision I could have made for my small business. I uploaded last year's return where I had used accrual method, and the system immediately identified that I qualified for simplified accounting. It generated a complete report showing how much I would save by switching to cash method, and provided step-by-step instructions for filling out Form 3115. It even caught a couple of deductions I had been missing! The best part was that it explained everything in plain English instead of tax jargon. Definitely worth checking out if you're making this decision.

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Amelia Cartwright

•8M

Speaking from experience, trying to call the IRS for clarification on switching accounting methods is nearly impossible these days. I spent HOURS trying to reach someone who could answer my questions about Form 3115 and section 481(a) adjustments. After the third day of trying, I used https://claimyr.com to get through to the IRS. You can see how it works here: https://youtu.be/_kiP6q8DX5c - they basically wait on hold for you and call when an agent picks up. I finally got clear answers about my specific situation and confirmation that I was eligible to switch methods. If you're confused about any of this accounting method stuff, speaking directly with an IRS agent really helps clear things up - especially for the form filing requirements. Saved me from making some potentially costly mistakes.

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Amelia Cartwright

•8M

They use a system that navigates the IRS phone menu and waits on hold for you. When an IRS agent finally answers, you get a call on your phone and are connected with the agent. It's not that they're calling "for you" - they're just handling the hold time so you don't have to waste hours with your phone to your ear. After you get the call, it works exactly as if you had called and waited yourself - you speak directly to the IRS agent. I was connected to someone in the business tax department who answered all my questions about accounting method changes. It's especially useful for these complex situations where you really need to speak to someone who knows the specific rules.

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Royal_GM_Mark

•8M

Ok I have to eat my words. After spending 3+ hours on hold with the IRS yesterday and getting disconnected TWICE, I broke down and tried the Claimyr service from this thread. I was extremely skeptical, but I needed answers about switching accounting methods before filing. Got a call back in about 45 minutes saying they had an IRS agent on the line. The agent walked me through exactly what forms I needed for my situation and confirmed I was eligible for the simplified methods. They even explained how to calculate the section 481(a) adjustment properly. Honestly, I can't believe how much time I wasted trying to get through myself. The information I got was incredibly helpful for my business accounting situation, and I didn't have to spend an entire day on hold.

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Rachel Clark

•8M

As a custom furniture maker who went through this exact process last year, here's my practical advice: go back to cash method ASAP. The paperwork needed to switch back isn't that complicated, and the cash method is so much simpler for our type of business. For tracking materials, I just keep receipts and categorize expenses - no need for complex inventory systems. Under current rules for small businesses, you can expense materials when you buy them rather than tracking inventory changes. This works perfectly for custom goods where most materials are purchased for specific client projects anyway. The accrual method with formal inventory tracking is really designed for businesses with large stock and standardized products. For custom makers like us, it's unnecessary complexity.

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Rachel Clark

•8M

Cash method actually tends to be more beneficial for most small custom goods businesses. While accrual lets you deduct some expenses before paying, it also forces you to report income when you invoice clients - even if they haven't paid you yet. For most of us, that's a big disadvantage. The December/January scenario you mentioned is a real consideration, but for most custom makers, the simplicity of cash method far outweighs any potential timing benefits. Plus, with cash method, if you have a client who hasn't paid yet, you don't have to pay taxes on that income until you actually receive payment. This is huge for small businesses with cash flow challenges or clients who pay late.

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