The "Cash Method" of accounting is enjoying a resurgence among community banks. Under the cash method of accounting, an item of income is included in income when actually received, and an expense is deductible when it is actually paid. When accrued interest receivable exceeds accrued interest payable, a bank’s taxable income is reduced using the cash method of accounting. This "excess" of accrued interest receivable over accrued interest payable can easily run into six-digit figures and translate into a large deferral of tax.
In a surprising move, the Internal Revenue Service made cash-basis accounting available to many banks in December of 2001 with the issuance of Rev. Proc. 2001-76. The revenue procedure grants blanket permission to many banks to compute their taxes on the cash basis. As a result, cash accounting is available to banks with average gross receipts for the three previous years of less than $10,000,000. For purposes of the gross receipts test or computation, tax-exempt interest income is included in gross receipts.
The availability of cash-basis accounting differs for C corporations and S corporations.