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Skatt og Økonomijanuar 29, 2021

Simplified Tax Accounting Rules for Small Businesses

Etter:CCH AnswerConnect Editorial

Curated by Kim Veverka, C.P.A.
Sr. Content Management Analyst, Wolters Kluwer

Final regulations have been issued that simplify the tax accounting for small business taxpayers.

The IRS has issued final regulations on the simplified tax accounting method rules for small-business taxpayers enacted by the Tax Cuts and Jobs Act (TCJA). Additionally, guidance is provided on special accounting rules for long-term contracts for corporate taxpayers. For tax years beginning after December 31, 2017, these simplified tax accounting rules apply for taxpayers with inflation-adjusted average annual gross receipts of $25 million (adjusted annually for inflation). The gross receipts test was put in place to determine whether certain taxpayers can use the cash method of accounting, are not required to use inventories, are not required to apply the uniform capitalization (UNICAP) rules, and are not required to use the percentage of completion method for a small construction contract. The final regulations are effective on January 5, 2021; however, taxpayers can apply the guidance for tax years beginning on or after December 31, 2017.

Background

The TCJA increased the gross receipts test amount to $25 million ($26 million beginning in 2019, 2020 and 2021) for eligibility to use the cash method and exempt taxpayers from:

This exemption does not apply to tax shelters. The regulations implement these statutory changes and provide clarifying guidance on the definition of an AFS, the types and amounts of costs reflected in an AFS that can be recovered, and when those costs can be taken into account. If taxpayers do not have an AFS, they can use their books and records.

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Highlights of the Final Regulations

Annual syndicate election. 

The proposed regulations permit a taxpayer to elect to use the allocated taxable income or loss of the immediately preceding tax year to determine whether the taxpayer is a syndicate for the current tax year. A syndicate is a partnership or other entity (other than a C corporation) if more than 35% of the losses of that entity during the taxable year are allocable to limited partners or limited entrepreneurs. The final regulations provide additional relief by making the election an annual election. The election is valid only for the tax year for which it is made, and once made, cannot be revoked. The IRS intends to issue procedural guidance to address the revocation of an election made under the proposed regulations.

5-year written consent requirement relaxed. 

The proposed regulations require a taxpayer that meets the gross receipts test in the current tax year to obtain the written consent of the Commissioner before changing to the cash method if the taxpayer had previously changed its overall method from the cash method during any of the five tax years ending with the current tax year. The final regulations remove the 5-year restriction on making automatic accounting method changes for certain situations.

Other changes. 

Additional changes include the following topics:

  • clarifications on inventory treated as non-incidental materials and supplies,
  • treatment of inventory by taxpayers with and without an AFS, and
  • inventory costs are clarified.
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Client Application

Inform your small business clients that the simplified tax accounting rules apply for taxpayers with inflation-adjusted average annual gross receipts of less than $25 million (adjusted for inflation to $26 million for 2019, 2020 and 2021, known as the gross receipts test). The gross receipts test was put in place to determine whether certain taxpayers can use the cash method of accounting and be eligible for an exception from the use of inventories, the UNICAP rules, and are not required to use the percentage of completion method for a small construction contract.

Client Profile

Small business taxpayers with average annual gross receipts of $25 million (inflation-adjusted to $26 million for tax years beginning in 2019, 2020 and 2021).

Effective Date

The final regulations are effective on January 5, 2021; however, taxpayers can apply the guidance for tax years beginning on or after December 31, 2017.

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