Relief for Small Business Tax Accounting Methods (as featured in Journal of Accountancy)

More About | Tax | Accounting Methods | Tax Reform

The law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, which generally took effect in 2018, provides welcome simplifications for small business taxpayers. This article highlights some of these new provisions compared with prior law and how small business taxpayers are affected.

As with most components of the Code, these new provisions are anything but simple. However, the TCJA generally provides that businesses with less than $25 million in gross receipts can now choose to:

  • Use the cash method of accounting instead of the accrual method of accounting (Sec. 448(c));
  • Not capitalize additional uniform capitalization (UNICAP) costs to inventory (Sec. 263A(i));
  • Treat inventories as nonincidental materials and supplies or use an inventory method that conforms to their financial accounting treatment of inventories (Sec. 471(c)); and
  • Not account for long-term construction contracts using the percentage-of-completion method (PCM) of accounting (Sec. 460(e)(1)(B)).

Changes to adopt each of these provisions will require a change in accounting method. The procedures for requesting a change in accounting method are discussed later in this article.