Tax Law Means Big Accounting Changes

For Small Business Owners



When it comes to accounting for income and expenses, most small business owners want to K.I.S.S. (Keep It Simple, Stupid). Not surprisingly, many are embracing the reforms recently created by the Tax Cuts and Jobs Act (TCJA). Notably, the TCJA opens up the cash accounting method, the simplest approach, to more small businesses.

Generally, a C Corporation isn’t eligible to use the cash method of accounting unless it meets a “gross receipts” test. Prior to the TCJA, the entity was required to have average annual gross receipts for the previous three years of no more than $5 million. The TCJA increased this threshold to $25 million, effective for 2018 and thereafter, with inflation indexing in future years. For 2019, the indexed threshold is $26 million.

Note that certain special rules apply for these purposes. For instance:

  • Gross receipts are aggregated for entities treated as a single employer.
  • A corporation that has existed for less than three years applies the gross receipts test based on the period for which it was in existence.
  • Gross receipts for a tax year of less than 12 months (e.g., due to a change in accounting period or for an initial year) are annualized by multiplying the gross receipts for the short period by 12 and dividing the result by the number of months in the short period.
  • The test for the entity includes any of its predecessors.

Besides the five-fold increase in the gross receipts threshold, the TCJA also exempts small businesses from requirements to account for inventories, capitalize certain costs and account for long-term contracts using the percentage-of-completion method.

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Source: CPA Practice Advisor

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