What is the difference between accrual and cash accounting for clinics?
Cash basis accounting records transactions when cash changes hands; accrual basis accounting records transactions when economic events occur (services performed, expenses incurred), regardless of cash timing.
Quick answer
Cash accounting recognizes revenue when payment is received and expenses when paid; accrual accounting recognizes revenue when services are performed and expenses when incurred. Most clinics under $30M revenue can use cash; larger groups and those preparing for sale typically need accrual.
The detail
Cash basis is simpler and is the default for most small clinics. Revenue is recorded when collected, expenses when paid. The 2017 Tax Cuts and Jobs Act expanded the cash method to businesses with average gross receipts under $25M (now $31M for 2025 per IRS Rev. Proc. 2024-40, indexed annually). For tax purposes, most outpatient clinics qualify and benefit from cash basis because payment timing can defer income into the next year. Accrual basis matches revenue to the period services were performed and expenses to the period incurred, regardless of cash timing. Buyers, lenders, and partners typically require accrual statements because they show economic reality more accurately. Most clinics planning for sale convert to accrual at least 12 to 24 months before going to market, since QofE (Quality of Earnings) review will normalize to accrual anyway. Mixing systems is common: cash for tax filing, accrual for management and sale-prep reporting.
Cash method is available for businesses with average gross receipts under $31M for 2025 per IRS Rev. Proc. 2024-40 (indexed annually).
Source: IRC Section 448
GAAP requires accrual basis for general purpose financial statements.
Source: FASB
Quality of Earnings reviews in M&A typically normalize cash-basis books to accrual to assess true earning power.
What this means for clinic owners
From Sorso
If you are within 24 months of a sale, start producing accrual financial statements now even if you file taxes on cash. Buyers will normalize to accrual either way, and presenting clean accrual statements yourself is much better than letting their diligence team build them.
Related questions
How much does healthcare accounting cost per month?
Outsourced healthcare accounting typically costs $1,500 to $5,000 per month for a single-location clinic, depending on transaction volume, locations, and whether you need controller-level oversight.
What does a medical practice valuation cost?
A formal medical practice valuation typically costs $5,000 to $25,000 depending on practice size, valuation purpose, and whether a calculation engagement or full opinion is required.
What are EBITDA add-backs in practice valuation?
EBITDA add-backs are non-recurring or owner-related expenses added back to reported EBITDA to show normalized earnings, typically increasing reported EBITDA by 10 to 30 percent in owner-operated practices.
How do I structure a practice for tax efficiency?
The most tax-efficient practice structure typically involves an S corporation or PLLC for the clinical practice, a separate LLC for real estate, an MSO for non-clinical services, and a defined benefit retirement plan, optimized to preserve QBI and balance payroll tax exposure.
Founder of Sorso. 19 years in corporate finance. Managed a $450M loan portfolio before building a fractional CFO firm exclusively for healthcare clinics.
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