Key figures
Federal accounting
2026, with sources
- Federal corporate income tax rate
- 21%A flat rate on a C corporation’s taxable income, computed on Schedule J of Form 1120.
- Gross receipts test (cash method, 2026)
- $32,000,000Average annual gross receipts for the 3 prior tax years; $31 million for 2025.
- Schedule M-3 instead of M-1
- $10 million in assetsRequired when total assets on the last day of the tax year are $10 million or more.
- Domestic research or experimental expenditures
- Deductible in the year paid or incurredSection 174A, for tax years beginning after Dec 31, 2024; or elect to amortize over at least 60 months.
- Foreign research or experimental expenditures
- Amortized over 15 yearsStill capitalized under Section 174, from the midpoint of the tax year.
- Bonus depreciation
- 100%Permanent for qualified property acquired after Jan 19, 2025, under Pub. L. 119-21; many states decouple.
- Section 179 expensing limit (2026)
- $2,560,000Reduced dollar for dollar once 2026 purchases of § 179 property pass $4,090,000.
Two sets of rules: US GAAP and the tax code
There is no federal law that says a private startup must keep US GAAP books. The requirement comes from the people who read them: investors, venture lenders, 409A valuation firms, acquirers and, eventually, auditors. US GAAP is written by the FASB and is accrual basis by design — revenue when earned, expenses when incurred.
Your tax return answers to a different authority: the Internal Revenue Code and the IRS. Tax rules borrow from GAAP but diverge in predictable places, and Form 1120 asks you to show your work. That is why a well-kept startup carries one set of accrual-basis books and a short, documented list of book-tax differences, rather than two sets of books.
Cash or accrual for tax: the Section 448 test
Under IRC Section 448, a C corporation generally has to use the accrual method for tax unless it meets the gross receipts test: average annual gross receipts for the three prior tax years at or below an inflation-adjusted ceiling. For tax years beginning in 2026, that ceiling is $32,000,000 (Rev. Proc. 2025-32); it was $31 million for 2025.
Almost every early-stage company is under it, so the cash method is usually available on the return. Choosing it does not change what your financial statements must show, and switching later needs an accounting-method change (Form 3115), so it is a decision to make once, with your preparer, on the first return.
Form 1120 and the book-tax reconciliation
A C corporation files Form 1120 by the 15th day of the 4th month after its tax year ends — April 15 for a calendar year — and can get six more months to file (not to pay) with Form 7004. The federal rate is a flat 21%. Schedule M-1 reconciles book income to taxable income; once total assets reach $10 million on the last day of the year, Schedule M-3 replaces it.
The common book-tax differences at a startup are few and recurring, which is why it pays to tag them in the books as they happen rather than reconstruct them in March.
- Stock-based compensation expensed for books but deductible only when exercised or vested for tax.
- Depreciation: book useful lives versus tax methods and bonus depreciation.
- Foreign research costs, still amortized over 15 years for tax.
- Meals and entertainment, which are partly or wholly nondeductible.
- Accrued bonuses and other liabilities not yet paid at year end.
Equipment: bonus depreciation and Section 179
Public Law 119-21 made 100% bonus depreciation permanent for qualified property acquired after January 19, 2025, so laptops, servers and office build-outs that qualify can be deducted in full the year they are placed in service. Separately, Section 179 lets a company elect to expense up to $2,560,000 of qualifying property for tax years beginning in 2026, reduced once purchases pass $4,090,000 (Rev. Proc. 2025-32).
For the books nothing changes: under US GAAP the same assets are capitalized and depreciated over their useful lives, and the gap is a book-tax difference. It is also the item states most often refuse to follow. California, Florida, New York and Delaware all add back some or all of federal bonus depreciation, so a deduction taken federally can sit as a state deferred tax item for years.
Section 174 after the 2025 law
From 2022 through 2024, the Tax Cuts and Jobs Act forced companies to capitalize research and experimental expenditures — including most software development payroll — and amortize them over five years (15 for foreign research). Public Law 119-21, the 2025 reconciliation law often called the One Big Beautiful Bill Act, added Section 174A: for tax years beginning after December 31, 2024, domestic research or experimental expenditures are deductible when paid or incurred, or the company can elect to amortize them over at least 60 months.
Foreign research stays capitalized over 15 years under Section 174. For the domestic amounts capitalized in 2022–2024, the IRS’s Rev. Proc. 2025-28 lays out the transition: small businesses that meet the gross receipts test could elect to apply Section 174A retroactively, and others can deduct the remaining unamortized balance starting with the first tax year beginning after 2024. Which path applies, and by when, is a question for whoever prepares your return.
Deadlines
- 15th day of the 4th month after year endFederal corporate income tax return (April 15 for a calendar-year company)Form 1120
- By the original Form 1120 due dateAutomatic six-month extension to file — not to payForm 7004
Accounting, state by state
Everything above applies everywhere. Each state then adds its own rules. Choose one to read its accounting page.
Point at a state, or shade the map by one question.
Common questions
Can my C-corp file its tax return on cash basis?
If your average annual gross receipts for the three prior years are $32 million or less (the 2026 figure) and you are not a tax shelter, the IRS generally lets a C corporation file on the cash method. That is a tax choice only. US GAAP statements, the ones investors, lenders and auditors ask for, are accrual basis regardless.
Do I still have to capitalize engineering salaries under Section 174?
For tax years beginning after December 31, 2024, domestic research or experimental expenditures — including software development done in the US — are deductible again under Section 174A, or you can elect to amortize them over at least 60 months. Research done outside the US is still amortized over 15 years. The IRS published transition rules for the 2022–2024 amounts in Rev. Proc. 2025-28.
Should my books match my tax return?
No. GAAP books record what happened economically; the tax return follows the Internal Revenue Code. The differences — stock compensation, depreciation, foreign R&E, accrued bonuses — are reconciled on Schedule M-1, or Schedule M-3 once total assets reach $10 million.
Founder guides on this
- The closeWhy startups should close their books every monthA monthly close turns a bank balance into numbers an investor, an auditor or a 409A firm will accept. What it is, and why it gets expensive to skip.
- US GAAPUS GAAP for early-stage startups, in plain EnglishAccrual accounting, revenue recognition (ASC 606), leases (ASC 842), stock compensation and capitalized software: what each means for a small company.
- FundraisingAudit-ready books before your Series AInvestors, lenders and auditors ask for the same things: accrual statements, reconciled accounts and support for every balance. How to be ready first.
- R&D taxThe R&D tax credit and Section 174A for startupsEngineering salaries can earn a federal R&D credit against payroll tax, and Section 174A lets you deduct US research again. What qualifies, what to track.
- Vibe accountingCan you vibe code your startup’s accounting?AI coding tools build a finance dashboard in an afternoon, but not a closed, reconciled, GAAP-basis ledger. Where the line is, and how to stay inside it.
More of the federal guide
- ReceivablesFederal receivables for startupsSales tax registration, economic nexus, whether SaaS is taxable, and collecting from customers
- PayablesFederal payables for startupsPaying vendors and contractors: 1099 filing, use tax, contractor tests and withholding
- PayrollFederal payroll for startupsWithholding, unemployment insurance, paid leave, minimum wage and the rules on paydays
- ComplianceFederal compliance for startupsRegistering to do business, annual reports, franchise tax and the filing calendar
- AdvisoryFederal advisory for startupsCredits, incentives and the decisions that are cheaper to get right the first time
Sources
Checked against each agency’s own page on . Rates and thresholds change, usually on January 1.
General information for US companies, not tax, legal or accounting advice for yours. Rules and thresholds change; confirm the specifics with a CPA or the agency before you act on them.