The Tax Cuts and Jobs Act accounting method provisions are allowing businesses greater use of the cash method of accounting and exemption from complex tax rules. An accounting method is the set of rules that apply to determine when an item or deduction is taken into account for tax purpose. The two most common methods are cash and accrual. Once an accounting method is established, it generally must be used consistently from year to year.
The cash methods available to only small business are generally simpler than the accounting methods required to be used by larger businesses. Under the cash method of accounting, income is generally recognized in the year cash is received and deductions are generally taken into account the year an expense is paid. Under the accrual method of accounting, income and expenses is generally recognized when earned or incurred, even if payment is received in a later year. Prior to December 31, 2017, limitations applied to corporations and partnerships with corporate partners. These taxpayers were prohibited from using the cash method of accounting for tax purposes unless their gross receipts were $5 million or less. Beginning December 31, 2017, the threshold has increased to $25 million.
The IRS guidance ,released August 3, 2018, is allowing small businesses with annual grow earning of $25 million or less in the prior three-year period to use the cash method of accounting. Business taxpayers are permitted under the Tax Cuts and Jobs Act may obtain an automatic consent to change accounting methods starting after December 31, 2017.
Under the new law, allows more taxpayers to use the cash method of accounting. Taxpayers switching from the accrual method to the cash method is required to complete Form 3115 to make this change. Businesses must apply the gross receipts test each year to determine whether it continues to be eligible to use the cash method.
Tax reform has dramatically changed US federal income tax rules. Consult your accountant or tax advisor to develop a tax strategy to determine whether a change in accounting method is consistent with that strategy.