Cash Accounting Method Expansion

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The Tax Cuts and Jobs Act (TCJA) has expanded the availability of the cash method of accounting for federal tax purposes. The cash method allows businesses more flexibility in tax-planning, which could allow deferment of taxable income. It may be a good idea for newly eligible companies to look into the cash method and the benefits it can provide.

New policies
The TCJA raised all thresholds for the cash accounting method to $25 million, beginning with the 2018 tax year. So, if your business’s average gross receipts for the previous three tax years were under $25 million, you will probably be eligible for the cash method. Construction firms under the threshold no longer need to use the percentage-of-completion method for jobs expected to be completed in the next two years.

The TCJA changes have made the same businesses eligible for streamlined inventory accounting rules. It has also exempted them from complex uniform capitalization rules that require certain expenses to be capitalized as inventory costs.

Previously the following businesses were not allowed to use the cash method:

  • C corporations, and partnerships (or limited liability companies taxed as partnerships) with C corporation partners whose average gross receipts for the previous three tax years exceeded $5 million
  • Businesses required to account for inventories whose average annual gross receipts for the previous three tax years exceeded $1 million ($10 million for some industries)
  • Construction companies whose average gross receipts for the previous three tax years exceeded $10 million

Construction companies that exceeded the $10 million threshold were required to use the percentage-of-completion method to account for taxable income from long-term contracts (excluding certain home construction contracts). The percentage-of-completion method is usually less favorable than the completed-contract method for tax purposes.

Deciding to switch
The cash method carries with it tax benefits, but it may not be right for every company. The TCJA does have a provision limiting the cash method advantages for businesses that prepare audited financial statements or file financial statements with certain government entities. Another consideration is the cost to switch, as it can include maintaining two sets of books.

Usually, if a business’s receivables exceed its payables, the cash method allows more income to be deferred than the accrual method does, which is beneficial for tax purposes.

The IRS has established methods for obtaining automatic consent to switching beginning with the 2018 tax year by filing Form 3115 with your tax return.

If you want to discuss switching to the cash method, we can answer any questions you may have. We can also look at the benefits you would gain from changing. Call us at 818-334-8623 or click here, and we will contact you.

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