Again, you can usually choose the method of accounting that is most advantageous for your business, unless your business stocks an inventory of items that you will sell to the public, or your business has sales of more than $5 million per year.

Tax Years and Accounting Periods

Income and expenses must be reported to the IRS for a specific period of time, called your tax year, your accounting period, or your fiscal year.

Unless there is a valid business reason to use a different period, or your business is a corporation, you'll have to use the calendar year, beginning on January 1 and ending on December 31. Most business owners use the calendar year for their tax year, simply because they find it easy and natural to use. If you want to use a different period, you must request permission from the IRS by filing Form 8716, Election to Have a Tax Year Other Than a Required Tax Year.

Also, your fiscal year can't begin and end on just any day of the month: It must begin on the first day of a month and end on the last day of the previous month one year later.