Should Your Business Make a Tax Accounting Method Change?

The many changes brought about by the Tax Cuts and Jobs Act (TCJA) have been largely beneficial for businesses across all industries. One change in regard to tax accounting methods is particularly advantageous for contractors and manufacturers: an increased annual gross receipt threshold of $25 million for tax years beginning after December 31, 2017.

Justin Spinler November 26, 2018

With this increase, your business may have more options for its accounting method than ever before. Here are a few of the options now available.

Increased threshold for use of the cash basis method of accounting
Previously, C corporations with average annual gross receipts of $5 million or less were able to use the cash basis method of accounting. Other C corporations were required to use the accrual method. Thanks to the TCJA, this threshold has undergone a five-fold increase. Could your business now be able to use the cash basis method of accounting?

The cash basis method of accounting can be advantageous because it allows you to recognize income when you receive it. In most cases, it allows you to time your tax payments more closely with when you’re actually pocketing the funds.

Exemption from Uniform Capitalization (UNICAP) and inventory requirements

Prior to the TCJA, businesses with $10 million or more in annual gross receipts were required to follow certain UNICAP and inventory requirements. Regarding UNICAP, taxpayers were required to include in inventory or capitalize certain costs, including an allocable portion of indirect costs related to real or tangible personal property (produced by the taxpayer or acquired for resale). Taxpayers with inventory were required to use the accrual method of accounting unless they met certain exceptions. Now, with the threshold increased to $25 million, the UNICAP requirements may no longer apply to your business.

Exemption from the percentage-of-completion method for long-term contracts

The increased threshold may exempt you from having to use the percentage-of-completion method of accounting for long-term contract, too. Whereas previously taxpayers with average annual gross receipts of $10 million or less were considered “small contractors” and therefore exempt from

using this often cumbersome accounting method, the increased threshold makes it possible for more taxpayers to be exempt from the percentage-of-completion method.

Could you benefit from an accounting method change?

In light of the new developments mentioned above, it’s a good time to revisit your tax accounting methods to determine if a change would be beneficial. Sometimes a change can help to relieve the burden of administrative time and even reduce your tax burden. Making an accounting method change requires filing certain forms, and it’s advantageous to act sooner rather than later. If you’d like to explore your options, please give us a call today.