The sweeping changes of recent tax reform may impact the choice of how business taxpayers maintain their financials, specifically regarding the cash vs accrual methods of accounting. In tax years beginning after December 31, 2017, taxpayers may select their accounting method according to the new limits and conditions, as applicable:
- Taxpayers whose average annual gross receipts for the immediately preceding three years did not exceed $25 million and is made available to producers and resellers of both real and personal property, rather than just resellers may qualify for an exception from the uniform capitalization (UNICAP) rules that applied before tax reform.
- Taxpayers that have average annual gross receipts of $25 million or less during the preceding three years are not required to account for the cost of goods sold and, thus, are not required to use the accrual method of accounting. Instead, they may use a method of accounting for inventories that either treats inventories as non-incidental materials and supplies; or conforms to the taxpayer’s financial accounting treatment of inventories.
- Corporations and partnerships that have a corporation as a partner satisfy the gross-receipts test for the tax year if the taxpayer’s average annual gross receipts are under $25 million for the three tax-year period ending with the tax year that precedes the tax year for which the taxpayer is being tested. The $25 million limit is adjusted for inflation for tax years beginning after 2018.
- A farming business owned by a C corporation (or partnerships with such a C corporation as a partner) is exempt from the rule requiring such corporations to use the accrual method if the corporation meets an inflation-adjusted $25 million gross-receipts test for the tax year. This limit replaces both the non-inflation-adjusted $25 million limit for family corporations and the $1 million limit for non-family corporations in effect before tax reform.
Tax reform permits taxpayers in certain circumstances to recognize income for tax purposes no later than the year in which it is recognized for financial reporting purposes:
- For an accrual basis taxpayer, the all events test with respect to any item of gross income will not be treated as met any later than (and, thus, these taxpayers must recognize income no later than) the tax year in which the income is recorded as income.
- Taxpayers may defer the inclusion of income associated with certain advance payments to the end of the tax year following the tax year of receipt if that income also is deferred for financial statement purposes.
Tax law changes may impact on a businesses’ accounting method choice, and warrant a company to review and, possibly, revise those choices.
