If your business uses the cash method, two of the simplest tax planning strategies for small businesses are about timing, not spending: bill some December work in January, and pay certain 2027 expenses before December 31. Neither erases tax, but both can move part of your 2026 bill into 2027 when your cash flow allows it and the rules line up.
Both moves depend on the cash method
Under the cash method of accounting, you report income in the year you actually or constructively receive it, and you generally deduct expenses in the year you pay them, according to IRS Publication 538. An accrual method works differently: income generally counts once you have earned the right to it, so sending the invoice later does not move it.
Sole proprietors and S corporations commonly use the cash method. Under the general federal test, a C corporation, or a partnership with a C corporation as a partner, can use it only if its average annual gross receipts for the three prior years are $32,000,000 or less for tax years beginning in 2026, per Rev. Proc. 2025-32. Related businesses treated as a single employer, such as a controlled group, add their gross receipts together for that test.
Publication 538 adds exceptions: a tax shelter cannot use the cash method, a qualified personal service corporation (such as a qualifying law, accounting, health or consulting firm) can use it whatever its receipts, and farming and inventory businesses have their own rules.
The method belongs to the business. For an S corporation or partnership, the entity's books decide the timing, and the result flows through to you on your K-1.
Move 1: bill December work in January
If you have not invoiced a client and the client has not paid, a cash-method business has nothing to report. Billing on January 4 instead of December 14 can push the payment onto your 2027 return, but only if the client would actually have paid in December.
The limit is constructive receipt. Publication 538 treats income as received once it is credited to your account or made available to you without restriction, even if you have not touched it. It also says you cannot hold checks or put off taking possession of a payment to push the tax into the next year. In practice:
- A check that arrives on December 29 is 2026 income, even if you deposit it on January 4.
- Money credited to your account in December counts in December, whether or not you move it or record it.
- Payment collected by someone acting as your agent counts when the agent receives it, not when it reaches you.
- A retainer or other advance payment already paid to you is generally income when received. Delaying the invoice for it changes nothing.
A deposit you expect to return is a different case. For rentals, for example, Publication 527 says a security deposit you plan to give back is not income when received. Deferral also has a cost: the cash arrives later. If that strains payroll, the tax timing is not worth it.
Move 2: prepay expenses that meet the 12-month rule
The general rule is that an expense you pay in advance is deductible only in the year it applies to. The exception is the 12-month rule. Publication 538 says you do not have to capitalize a prepayment, meaning spread its cost over the years it covers, when the benefit does not extend beyond the earlier of 12 months after it begins, or the end of the tax year after the year you pay.
Both limits apply. A one-year insurance policy that starts January 1, 2027 passes, because it ends December 31, 2027. Rent paid in December for February 2027 through January 2028 fails, because it runs past the end of 2027, so you deduct it across 2027 and 2028 and nothing in 2026. A three-year policy fails too; Publication 538's own example spreads a 36-month premium across four tax years.
The 12-month rule only removes the requirement to spread the cost. The payment still has to be a deductible business expense on its own terms, and some prepayments follow separate rules. Interest is one: Publication 550 says interest paid in advance for a period beyond the end of the tax year generally has to be spread over the years it belongs to.
Then check your accounting method. Publication 538 says you choose a method when you file your first return, and after that you generally need IRS approval to change how you treat an item such as prepaid expenses. A business that has been spreading prepayments over the months they cover would be changing its method, which generally means filing Form 3115. That does not always mean waiting for a letter: for changes that qualify for automatic consent, the Form 3115 instructions say the original form goes with your timely filed return, including extensions, for the year of change. Ask your preparer which applies before you write the check.
Prepay only costs you were going to pay anyway; a deduction gives back your marginal rate, not the full dollar, which is why our team runs the arithmetic on any December spending first.
A worked example with round numbers
Take an invented Torrance design studio: an S corporation on the cash method with a calendar tax year, already applying the 12-month rule. In December 2026 the owner holds $40,000 of invoices until January 4, 2027. Assume the clients would have paid all $40,000 by December 31, 2026 if billed in December, and pay in January 2027 when billed in January. On December 15, 2026 the studio also pays a $24,000 premium for a one-year business insurance policy covering January 1 through December 31, 2027.
| Item | Effect on 2026 income | Effect on 2027 income |
|---|---|---|
| Invoices held until January | -$40,000 | +$40,000 |
| 2027 insurance prepaid in December | -$24,000 | +$24,000 (no premium left to deduct in 2027) |
| Net shift | -$64,000 | +$64,000 |
Assume a combined federal and California rate of 40% on the owner's share of the income in both years, a round figure for illustration only. About $25,600 of tax then moves from the 2026 return to the 2027 return. If the clients would have paid in January either way, holding the invoices shifts nothing, and the prepaid premium alone moves about $9,600. The example leaves out California's separate tax on the S corporation itself, covered below.
Either way, the tax comes due a year later rather than disappearing. The move pays off only when your 2027 rate is the same or lower and the business can afford to collect later and pay sooner; if you expect a much bigger 2027, deferring income could cost more than it saves.
What California does with the same moves
California generally follows the same timing. The 2025 Schedule CA (540) instructions say California conforms to the Internal Revenue Code as of January 1, 2025, and they list no state difference for the cash method or prepaid expenses. For S corporations, the FTB's 2025 Form 100S booklet says California conforms to certain federal changes to small-business accounting methods for tax years beginning on or after January 1, 2019.
The same booklet says an S corporation that makes a permitted federal method change is generally treated as having the Franchise Tax Board's approval if it files a timely Form 100S consistent with the change, the change is consistent with California law, and it attaches a copy of Form 3115. It also notes that an S corporation pays California's own 1.5% tax on its income, with an $800 minimum franchise tax. The FTB had not published its 2026 Schedule CA (540) instructions as of November 5, 2026; check them before you file.
Where timing fits among tax planning strategies for small businesses
Moving income and expenses between years is one of the more practical tax planning strategies for small businesses, because it costs only the timing of your cash. It works best as part of a year-round planning engagement, where you can see 2026 and 2027 side by side. If you want to check whether these moves fit your numbers, Book Your Free Consultation.
