Final answer:
A cash-method business can use the cash method to account for gross profit if it is a retail or service business with average gross receipts that have not exceeded $26 million annually in the past three years.
Step-by-step explanation:
A cash-method business may use the cash method to account for gross profit under certain conditions. These conditions include:
If the business is primarily a retail business and its average gross receipts for the past three years have not exceeded $26 million annually.
If the business is primarily a service business and its average gross receipts for the past three years have also not exceeded $26 million annually.
Therefore, both retail and service businesses that meet the criterion of not exceeding the gross receipts threshold can use the cash method for accounting for their gross profits according to the current tax laws.
Example of Calculating Accounting Profit
A firm had sales revenue of $1 million last year. It spent $600,000 on labor, $150,000 on capital, and $200,000 on materials. The firm's accounting profit would be the total revenue minus these explicit costs, which calculates to $1,000,000 - ($600,000 + $150,000 + $200,000) = $50,000.