Doctrine of cash equivalence

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The Doctrine of Cash Equivalence states that the U.S. Federal income tax law treats certain non-cash payment transactions like cash payment transactions for federal income tax purposes.^[1] The doctrine is used most often for deciding when cash method (as opposed to accrual method) taxpayers are to include certain non-cash income items. Another doctrine often used when trying to determine the timing of the inclusion of income is the constructive receipt doctrine.^[2]

Most individuals begin as cash method taxpayers because their first form of bookkeeping is a checkbook.^[3] In contrast, some businesses start as accrual method taxpayers because businesses use different rules for recording income and expenditures.^[4] The Internal Revenue Code (IRC) § 446(a) states, however, that "[t]axable income shall be computed under the method of accounting on the basis which the taxpayer regularly computes his income in keeping his books."^[5]

One of the major advantages to the cash method of accounting is the ability to defer taxation because the recognition of income applicable to amounts in accounts receivable can be deferred to a later year.^[6] The Doctrine of Cash Equivalence is important because many people are cash method taxpayers and would be subject to this rule.