Tax-exempt dividends represent interest earned by ETFs or mutual funds holding tax-exempt bonds. Thus, the dividends are reported as tax-exempt interest on the federal income tax return (line 2a of Form 1040 or 1040-SR). They are fully tax free for federal income tax purposes, although they are taken into account in figuring the taxable portion of Social Security benefits. However, tax-free interest dividends may receive different treatment on the state tax level (they may be only partially or non-exempt).
A business method of accounting requiring income to be reported when earned and expenses to be deducted when incurred. However, deductions generally may not be claimed until economic performance has occurred.