Cash vs Accrual Accounting: $32M Tax Test and GAAP for SaaS

Cash vs accrual accounting is three decisions for a SaaS company: the tax return, the investor statements and the runway. The IRS lets a C corporation file on cash until its average gross receipts pass $32M (2026). Investors’ and lenders’ standard contracts want GAAP accrual from signing. Keep the books on accrual and read cash from them.

The first decision turns on a threshold that has been reset seven times since 2018, so an older source gives an older figure. A 2014 Congressional Research Service report puts it at $5 million; other published sources still give $10M, $25M, $26M and $30M. For tax years beginning in 2026 the IRS figure is $32,000,000 (Rev. Proc. 2025-32), or 6.4 times the figure in the CRS report (our arithmetic). For a venture-backed SaaS company the threshold is also the wrong place to start, because investors usually ask for accrual much earlier.

Cash vs accrual accounting for one $12,000 annual plan paid upfront on 1 October

	Cash basis	Accrual basis (US GAAP)
Revenue recorded	When the customer pays	As the service is delivered (ASC 606)
Expenses recorded	When paid	When incurred
Revenue from the plan in the first calendar year	$12,000	$3,000
Liability at 31 December	None	$9,000 of deferred revenue, a contract liability
Sales commission on the plan	An expense when paid	An asset, amortised, unless the amortisation period is a year or less (ASC 340-40)
Accepted for GAAP financial statements	No	Yes
Federal tax return of a C corporation	Allowed while 3-year average gross receipts stay at or below $32M (2026)	Required above $32M; allowed below
Who asks for it	The bank balance; the tax return of a small company	Investors, lenders, auditors and, at an IPO, the SEC

Source: CRS (2014) for the definitions; FASB ASU 2014-09 (ASC 606 and ASC 340-40); IRC §448 and Rev. Proc. 2025-32; NVCA model investors’ rights agreement (2025); Regulation S-X, Rule 4-01. The $12,000 plan is hypothetical, and its split is our arithmetic.

When does the tax code settle cash vs accrual accounting?

Only on the tax return, and only above $32M of average receipts. Under section 448 of the Internal Revenue Code, a C corporation, or a partnership with a C corporation as a partner, may not compute taxable income under “the cash receipts and disbursements method of accounting” (26 U.S.C. §448). The exception is a gross receipts test: average annual gross receipts over the 3 prior tax years at or below a dollar threshold. The statute says $25,000,000, indexed for inflation and rounded to the nearest $1M, and the IRS sets $32,000,000 for tax years beginning in 2026 (IRS, Rev. Proc. 2025-32). A company younger than 3 years averages over the years it has existed, a short year is annualised, and companies under common control add their receipts together. S corporations and partnerships without a C corporation partner fall outside the rule.

Congress wrote the test into the Tax Reform Act of 1986 at $5M, and for 31 years the number did not move. Under that version a company that failed once lost the cash method for good, because eligibility required passing the test “for all prior taxable years beginning after December 31, 1985”. The 2017 tax act raised the threshold to $25M, indexed it and made the test annual.

The cash-method threshold by tax year, and where each figure is still quoted

Tax years beginning in	Average gross receipts threshold	Set by	Still quoted by
1986 Act to 2017	$5M	IRC §448 as enacted (Pub. L. 99-514)	CRS (2014); James E. Wilson CPA
2018	$25M	Tax Cuts and Jobs Act (Pub. L. 115-97)	QuickBooks, as a GAAP rule
2019 to 2021	$26M	Rev. Procs. 2018-57, 2019-44, 2020-45	Preferred CFO; IRS Publication 538 (12/2024)
2022	$27M	Rev. Proc. 2021-45
2023	$29M	Rev. Proc. 2022-38
2024	$30M	Rev. Proc. 2023-34	Anchin (as current); NetSuite (for 2024)
2025	$31M	Rev. Proc. 2024-40
2026	$32M	Rev. Proc. 2025-32	None of the guides above

Source: IRC §448 and its amendment notes; the IRS revenue procedures listed; the guides named, as published on 3 October 2026. The $10M figure on the Wilson page matches 2014 bills that would have raised the threshold; none became law.

One error goes beyond age. QuickBooks attributes the threshold to GAAP regulations: “any business that is either publicly traded or produces over $25 million in sales revenue over a three-year period is required to use the accrual method” (QuickBooks). The threshold belongs to the tax code, which has no say over GAAP. Even the IRS’s own guide trails its revenue procedures: Publication 538, revised in December 2024, still gives “$26 million or less (indexed for inflation)” (IRS, Publication 538). The wrong threshold either forces a switch the law does not require or leaves a return on a method it no longer allows.

A company that fails the test “must change to an accrual method of accounting, effective for the tax year in which the entity fails to meet this test”, and files Form 3115. Since the 3-year average ignores profit and covers closed years, the answer is fixed before the year starts; no notice announces it. Germany’s tax version of cash vs accrual accounting, for contrast, waits for one. A trading business over €800,000 of turnover or €80,000 of profit in one year switches to accrual from the fiscal year after the tax office’s notice (Abgabenordnung, §141). A GmbH or AG never has the choice.

The switch brings a one-time catch-up, the section 481(a) adjustment: chiefly unpaid invoices not yet taxed, less unpaid bills not yet deducted. The IRS’s general procedure takes a negative adjustment at once. A positive one is spread over the year of change and the next 3 years, or taken at once by election below $50,000 (IRS, Rev. Proc. 2015-13, §7.03). A SaaS company that bills a year ahead and elects the §451(c) deferral described below can come out negative, its prepayments already taxed on receipt.

Will investors and lenders accept cash-basis books?

Rarely, if their contracts follow the standard templates. The National Venture Capital Association publishes what it calls “the industry-embraced model documents to be used in venture capital financings” (NVCA). Its model investors’ rights agreement, updated in October 2025, requires annual statements within 180 days of year end and quarterly statements within 45 days, “all prepared in accordance with GAAP” (NVCA, 2025). The audit sits in square brackets, and a drafting note tells the parties to weigh “the Company’s stage of development, costs, and timing associated with audited financial statements”. GAAP is the default; the audit is negotiable. Outside the template even the package is: a growth-equity fund buying existing shares in one bootstrapped, profitable European SaaS group settled for a short quarterly KPI spreadsheet, which says nothing about its books.

Sumo Logic’s 2019 investors’ rights agreement, filed with the SEC, shows the template at work: annual GAAP statements within 90 days, quarterly statements within 45 days and a monthly income statement and cash flow statement within 30 days (Sumo Logic, 2019). Its 2016 loan agreement with Silicon Valley Bank states that “Calculations and determinations must be made following GAAP”. The bank asked for audited GAAP statements within 180 days of year end, and waived that request automatically in any year the board did not require an audit (Sumo Logic and SVB, 2016). At an IPO the SEC closes the question: statements filed with it that are “not prepared in accordance with generally accepted accounting principles will be presumed to be misleading or inaccurate” (Regulation S-X, Rule 4-01).

What does accrual accounting mean for a SaaS company?

It means ASC 606. A company recognises revenue “when (or as) the entity satisfies a performance obligation”. One of the three tests for meeting an obligation over time is that “The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs” (FASB, ASU 2014-09). Cash collected first, or billed and due, becomes a contract liability, “an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration”. A contract signed before its service starts and invoiced once it begins, the $12,000 example in reverse, carries no balance until then. It appears only in the note on remaining performance obligations, which a private company may omit. Billed at signing with payment due, the same non-cancellable contract would carry a receivable and deferred revenue: on accrual books, invoicing policy decides whether a booking reaches the balance sheet.

The cost side moves too. ASC 340-40 tells a company to “recognize as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs”. The standard’s example is a sales commission, which may still be expensed when the amortisation period is one year or less. Paid soon after signing, as at some SaaS companies, the commission is a forward-start contract’s only entry: a cost with no revenue on cash books, an asset on accrual books.

A company that keeps cash books until its first priced round must therefore rebuild its contract balances on ASC 606 before the first quarterly statements fall due, 45 days after quarter end under the NVCA template. Books kept from the start for the most demanding reader avoid that rebuild.

Why keep accrual books when runway is measured in cash?

Because the cash view can be computed from accrual books, and the reverse cannot. Accrual books record every receipt and payment in the cash account, together with the service period each contract covers. A cash ledger is what remains once the service periods are dropped, and no later processing of the cash ledger restores them. With card payments the derivation works only if the ledger also carries the processor’s balance and the exchange differences between charges and batched payouts. Accrual records do carry estimates that can be wrong, while a bank balance can be checked to the cent; the asymmetry concerns what each ledger contains and says nothing about accuracy.

Investors already ask for both views from the same books, Sumo Logic’s every month. Zendesk’s 2014 IPO prospectus shows how far the two sides of cash vs accrual accounting can diverge in a growing subscription company. It recognised subscription revenue “on a straight-line basis over the contractual term” and recorded payments in advance as deferred revenue (Zendesk, 2014).

Zendesk lost money on accrual and generated cash in 2013, $ millions

	2012	2013
Revenue	38.2	72.0
Net loss (GAAP, accrual)	(24.4)	(22.6)
Increase in deferred revenue	7.7	13.9
Net cash from operating activities	(5.1)	4.0

Source: Zendesk, Inc., Form S-1 (2014). Revenue rounded from $38,228k and $72,045k.

In 2013 the gap between the net loss and operating cash flow was $26.6M, and the $13.9M rise in deferred revenue explains about 52% of it (our arithmetic). Both lines came from one accrual ledger. A cash ledger could have produced something close to the last line and nothing like the second.

A board that saw only the cash line would have read a self-funding company, and one that saw only the loss, a company losing $22.6M a year. Where customers pay ahead, the lines also test the accrual estimates: profit that outruns operating cash quarter after quarter calls for reading the largest contracts against the revenue recognised, not the invoices. In one acquirer’s diligence, a single case outside SaaS, a fintech with a clean audit opinion had booked revenue on request, although its contracts allowed invoicing only after acceptance. It had no unconditional right to payment, the test ASC 606 sets for a receivable. Revenue grew as operating cash outflows widened; the buyer withdrew shortly before closing.

Does the cash method lower a SaaS company’s tax bill?

Not when customers prepay and the company is profitable. The tax method can be chosen separately, since the regulations allow the books and the return to differ. A taxpayer’s records include “a reconciliation of any differences between such books and his return” (26 CFR 1.446-1). The CRS report presents cash as the easier tax method, and NetSuite adds that it gives owners more control over taxable income. For a profitable SaaS company that bills a year in advance, the timing runs the other way.

The cash method counts income in the year it is actually or constructively received. An accrual-method taxpayer that receives an advance payment may elect to include only the part its financial statements recognise that year. It must then “include the remaining portion of such advance payment in gross income in the taxable year following the taxable year in which such payment is received” (26 U.S.C. §451). Only accrual-method taxpayers get the election. The financial statement that sets the split can be the investors’ own. Section 451 counts an audited GAAP statement used for “reporting to shareholders, partners, or other proprietors” as an applicable financial statement, and Publication 538 offers a version for companies without one.

One hypothetical $120,000 annual contract paid upfront on 1 October

Calendar-year C corporation	Cash method	Accrual method with the §451(c) deferral
Taxable income, year of payment	$120,000	$30,000
Taxable income, following year	$0	$90,000
Federal tax at 21%, year of payment	$25,200	$6,300
Federal tax at 21%, following year	$0	$18,900

Source: CX Cash calculation for a hypothetical company with taxable profits in both years; federal rate from 26 U.S.C. §11(b).

The cash method collects $18,900 of tax a year early on one contract. The deferral stops after one year, so a three-year contract paid upfront is fully taxed by the second year. A loss-making startup pays no federal income tax under either method; for it, the method changes the size of the loss it carries forward.

The CRS report’s own example makes the cash method look neutral. Its fictional subscription company collects $2,400 upfront for 2 years of service, pays $180 of tax in the first year on the cash basis against $60 on accrual, and recovers $60 the next year by carrying a loss back. The report concludes: “Taxes and net income are the same as under cash basis over the life of the subscription, but timing varies” (CRS, 2014). The 2017 tax act removed that carryback for most companies. A loss now only carries forward, and losses from 2018 onward offset at most 80% of later taxable income (26 U.S.C. §172). Run under current law, the cash-basis company pays $180 over the two years against $120 on accrual, 50% more, until future profits absorb its loss (our arithmetic).

Is cash accounting ever the better choice?

For watching the bank balance, yes, and practitioners who serve small businesses make that case well. James E. Wilson CPA puts it plainly: “You will always know your bank balance.” The firm adds that accrual “might not account for a company with a major cash shortage in the short term, despite looking profitable in the long term” (James E. Wilson CPA). The CRS report raises the tax version of the worry: paying tax on income a business has not yet collected “involves risk and can jeopardize a business’s financial health”.

Wilson has runway right. A startup fails when the bank balance reaches zero, whatever its accrual profit, and the runway model belongs in a cash forecast. The CRS worry holds for businesses that invoice first and collect later, since accrual can tax a receivable before the money arrives. Washington imposes accrual on larger companies and budgets mostly in cash itself. In 2014 the CRS noted that “The President’s budget is prepared primarily using cash basis”.

A SaaS company that bills annually in advance sits on the other side of both points. Prepayment puts the cash ahead of the revenue, so accrual with the §451(c) election defers tax instead of accelerating it. And the GAAP set already includes a statement of cash flows, which makes the bank-balance case an argument for reading that statement every month rather than for keeping the books on cash.

Which method should a SaaS company use?

Accrual for the books, from the first annual contract billed in advance: the investors’ and lenders’ templates ask for GAAP from signing, and an accrual ledger yields the cash view as well. The tax return is a separate choice. A C corporation may stay on cash while its 3-year average gross receipts are at or below that year’s threshold, $32M for 2026, but a profitable company that bills a year upfront pays tax earlier on cash than on accrual with the §451(c) deferral. Runway is the one decision that only cash can answer, and the monthly statement of cash flows, read from the accrual ledger, supplies it.

Notes and sources

• Congressional Research Service (2014). Cash Versus Accrual Basis of Accounting: An Introduction, Report R43811.
• FASB (2014). Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), including Subtopic 340-40.
• Germany. Abgabenordnung (Fiscal Code), §141, bookkeeping duty of certain taxpayers (text in force in 2026).
• IRS (2015). Revenue Procedure 2015-13, general procedures for changes in method of accounting, §7.03 (section 481(a) adjustment periods).
• IRS. Revenue Procedures 2018-57, 2019-44, 2020-45, 2021-45, 2022-38, 2023-34, 2024-40 and 2025-32 (inflation-adjusted items for 2019 to 2026); Publication 538, Accounting Periods and Methods (12/2024).
• James E. Wilson CPA, LLC. Accrual Accounting vs. Cash Basis Accounting: What’s the Difference?
• National Venture Capital Association (2025). Model Investors’ Rights Agreement, updated October 2025; Model Legal Documents.
• QuickBooks (Intuit). Cash vs. Accrual Accounting: Which is Best?; Anchin, Block & Anchin; NetSuite; Preferred CFO: the sources cited in the threshold table.
• SEC. Regulation S-X, Rule 4-01 (17 CFR 210.4-01).
• Sumo Logic, Inc. (2020). Form S-1, Exhibit 4.2, Amended and Restated Investors’ Rights Agreement (1 May 2019), and Exhibit 10.14, Loan and Security Agreement with Silicon Valley Bank (31 January 2016).
• US Code, Title 26: §11 (corporate tax rate), §172 (net operating losses), §448 (limitation on use of the cash method) and §451 (taxable year of inclusion); Treasury Regulation 26 CFR 1.446-1.
• Zendesk, Inc. (2014). Form S-1 registration statement.

Tax figures come from the Internal Revenue Code, its regulations and the IRS revenue procedures; the reporting terms from the NVCA model documents and Sumo Logic’s filed agreements; the Zendesk figures from its S-1. Any figure without a citation, like those marked “our arithmetic”, was calculated by CX Cash from the sources listed; the $12,000 plan and the $120,000 contract are hypothetical. The tax comparison covers federal income tax only.