Posted by Jordon Rosen, CPA, MST, AEP®
The Tax Cuts & Jobs Act (TCJA) incorporates four tax accounting changes that are noteworthy.
- Use of Cash Method of Accounting: Pre-TCJA, most C corporations and partnerships with a C corporation as a partner was prohibited from using the cash method of accounting. The exceptions to the rule were personal service corporations. Taxpayers not operating as a C corporation were not prohibited from using the cash method of accounting.
For tax years beginning after 2017, the rule is expanded so that all taxpayers (except tax shelters) that meet the gross receipts test, can use the cash method of accounting regardless of whether the purchase, production or sale of merchandise is an income-producing factor. This includes farming corporations or partnerships with a C corporation as a partner. To satisfy the gross receipts test, the average annual gross receipts of the business over the prior 3 years must be less than $25 million.
- Accounting for Inventory: For tax years beginning after 2017, taxpayers that meet the $25 million gross receipts test (above) can account for inventories as (1) non-incidental materials and supplies or (2) under the same method that conforms to the taxpayer’s financial statement treatment of inventories. The use of this provision would be considered a change in accounting method, subject to any Section 481 adjustment.
- Inventory Capitalization (Section 263A): For tax years beginning after 2017, producers or resellers that meet the $25 million gross receipts test (above) will be exempt from the Section 263A UNICAP rules which required certain carrying and warehousing costs to be capitalized as part of the inventory and not deductible as a period cost. The new exemption does not change prior to exemptions from the UNICAP rules that are not based on gross receipts. The use of this provision would be considered a change in accounting method, subject to any Section 481 adjustment.
- Accounting for Long-Term Contracts: for contracts entered into after 2017 in tax years ending after 2017, the exception from the use of the long-term contract method of accounting is expanded to include contracts expected to be completed within two years of commencement where the taxpayer performing the work is expected to meet the $25 million gross receipts test for the year in which the contract is entered into. This is in addition to the Pre-TCJA exception if the average 3-year gross receipts do not exceed $10 million.
If you have questions or want further information on the above or other income, retirement or estate planning techniques, please contact Jordon Rosen at firstname.lastname@example.org.