Accrual vs Cash Accounting

[valrory]

My spouse started a business to renovate & flip houses.  This will be my first year to do our business tax return.

In previous years, the company that did his taxes reported his business as cash accounting method.  I am a little confused because what I have read on the IRS website, leads me to believe that we should report our business as accrual method.   

On our prior year returns, inventory (purchase of house + improvement cost) was reported as an asset.   And when the house was sold, the sale was reported as income and the inventory expensed to cost of goods sold.

Can you still have inventory and "work in process" if your business is considered cash basis method?   Ideally, we need to recognize the house improvement cost at the same time as we recognize the sale.

[IsabellaG · Accepted solution]

You can still use the cash basis. Even using the cash basis, the house and the improvement costs are as you already said inventory. You can use the cash basis for your income and expenses and still use the cost of the inventory as Cost of Goods Sold.