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Tax Reform Series: Small Business Tax Accounting Methods

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The December 22 Tax Cuts and Jobs Act contained major tax changes and reform affecting both businesses and individuals. 

The following is a summary of changes regarding tax accounting methods for qualifying small businesses. For Berntson Porter’s White Paper on the full impact of the new tax legislation, click here.

In the past, businesses with average annual gross receipts over the prior three years greater than $10 million were required to employ specific tax accounting methods, such as:

  • Accrual basis tax accounting ($5 million for C-corporations)
  • Percentage-of-completion tax accounting (subject to certain exclusions)
  • Uniform capitalization (263A), which requires capitalizing indirect costs to inventory

With the prior signing of the new law, the income threshold is increased to three-year average annual gross receipts in excess of $25 million.

This means that taxpayers who would otherwise have been required to use accrual method tax accounting can now utilize a cash basis method, even if they are a C-corporation, a partnership with a C-corporation partner, or carry inventory on their balance sheet.

As a result, qualifying businesses are able to treat inventory as non-incidental materials and supplies OR conform to its financial accounting treatment. This means that if a company chooses to expense its inventory purchases and not capitalize inventory on their books and records, they could take a tax deduction for those costs in the year they were paid. GAAP financial statements do require inventory capitalization, and therefore, a requirement to keep your books on GAAP could preclude you from writing off inventory purchases as they are paid for.

Additionally, small businesses will be permitted to use the completed-contract method, or any other permissible contract method, instead of percentage-of-completion.

These changes are considered voluntary and automatic, subject to a section 481(a) adjustment and disclosure to the IRS.

Can changing your accounting method benefit your company? Connect with your Berntson Porter representative for more information.

Your team at Berntson Porter looks forward to working with you on this historic change to our tax system. If you have any questions, please contact your tax professional at Berntson Porter & Company, PLLC at 425-454-7990.