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Two primary accounting methods, cash and accrual basis, are used to calculate taxable income for U.S. federal income taxes. According to the Internal Revenue Code, a taxpayer may compute taxable income by As a general rule, a taxpayer must compute taxable income using the same accounting method he uses to compute income in keeping his books.[2] Also, the taxpayer must maintain a consistent method of accounting from year to year. Should he change from the cash basis to the accrual basis (or vice versa), he must notify and secure the consent of the Secretary.[3] Cash basis taxpayers include income when it is received, and claim deductions when expenses are paid.[4] A cash basis taxpayer can look to the doctrine of constructive receipt and the doctrine of cash equivalence to help determine when income is received. Most individuals start as cash basis taxpayers. There are three types of taxpayers that cannot use the cash basis (1) C corporations; (2) partnerships with at least one C corporation partner; and (3) tax shelters.[5] Similar definition of cash basis accounting is true for financial accounting purposes.[6]
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