Proposed Regulations Address Small Business Simplified Accounting Rules

The IRS has issued proposed regulations on the simplified tax accounting method rules for small-business taxpayers enacted by the Tax Cuts and Jobs Act (TCJA). For tax years beginning in 2019 and 2020, these simplified tax accounting rules apply for taxpayers with inflation-adjusted average annual gross receipts of $25 million (adjusted for inflation to $26 million for 2019 and 2020) or less (known as the gross receipts test). Taxpayers classified as tax shelters are prohibited from using the simplified rules even if they meet the gross receipts test.

The TCJA also exempted small business taxpayers from the uniform capitalization rules (UNICAP) and added an exception to the requirement to use an inventory method if their inventory is treated as nonincidental materials and supplies, or in accordance with the applicable financial statement (AFS). If they do not have an AFS, taxpayers can use their books and records. The proposed regulations implement these statutory changes and provide clarifying guidance on the definition of an AFS, and the types and amounts of costs reflected in an AFS that can be recovered and when those costs can be taken into account.

The proposed regulations address a variety of issues:

  • application of the gross receipts to taxpayers that are not corporations or partnerships;
  • amounts not related to a taxpayer’s trade or business– items such as Social Security benefits, personal injury awards and settlements, disability benefits, and wages received as an employee are generally excluded from gross receipts;
  • allows taxpayers to determine the amount of their applicable materials and supplies by using either a specific identification method, a first-in, first-out (FIFO) method, or an average cost method, provided that taxpayers use the method consistently;
  • proposed regulations provide guidance for small businesses with long-term construction contracts and the requirements for exemption from the percentage-of-completion method and the uniform capitalization rules;
  • taxpayers with income from long-term contracts reported under the percentage-of-completion method, guidance is provided for applying the lookback method after repeal of the corporate alternative minimum tax and enactment of the base-erosion and anti-abuse tax (BEAT).

Please contact the Crosslin tax team at (615) 320-5500.  We can help you determine the impact of this guidance and how an accounting method change may affect your business.  As always, we appreciate your business!