Schedule C Accounting Method Selection for New Sole Proprietor - Cash or Accrual?

You're on the right track with using the cash method! Most small businesses, especially service-based ones like your client's, benefit from using the cash method on Schedule C. Based on what you described, cash method makes perfect sense because you're recording income when you receive the money and expenses when you pay them. For the donations situation, under cash method, the money would still be counted as income when received, even if it's intended for future classes. The IRS generally doesn't allow businesses to defer recognizing income they've actually received just because it might be earmarked for future use. The timing of when services are provided doesn't change when the income is recognized under cash method. The one exception might be if you could structure these contributions as true advance payments that require specific future services to be rendered, but from your description, these sound more like general donations to support the business.

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I've been preparing Schedule C returns for clients for years. Generally, for service businesses like your client's, cash basis is almost always the better choice, especially if their annual gross receipts are under $25 million. It's simpler and typically results in better tax outcomes. For the donation situation, I'd suggest considering whether these are actually business income or if they could potentially be structured differently. Are these truly donations or are they advance payments for services? The distinction matters for tax purposes. If they're paying for future specific classes, that's business income. If they're general supporters with no expectation of specific services, you might have a different situation.

Has anyone else had issues with switching accounting methods on Schedule C after the first year? I started with accrual and realized cash would have been better, but the hassle of filing Form 3115 to change methods has been a nightmare!

For a new sole proprietor with that revenue level ($40-50k), cash method is definitely the right choice. You're correct that it's straightforward - income when received, expenses when paid. Regarding the donations for future classes, since people are giving money with the expectation of receiving services (even if not yet scheduled), this is advance payment for services, not a true donation. Under cash method, you'll recognize this income when received. This is actually quite common for service businesses - think gym memberships, annual software subscriptions, etc. One practical tip: keep good records showing what these advance payments are for and track when you deliver the corresponding services. This helps with business planning and ensures you're fulfilling your obligations to those who prepaid. Cash method will serve your client well, especially starting out. The simplicity alone is worth it, and most small service businesses never need to switch to accrual unless they hit the $25M gross receipts test or have significant inventory.