COVID Resources

The Tax Cuts and Jobs Act—Expanding the Cash Method of Accounting

PART 6

The Tax Cuts and Jobs Act (TCJA) allows more businesses to use simpler accounting methods, but the new laws still are complicated. So let’s take a closer look at how the changes might alter the way you do business. 

For many years the use of the cash method of accounting has been limited based on the size, type, and corporate form of the business.  Businesses over certain revenue thresholds (ranging from $1 million to $10 million) may have been required to use the accrual method of accounting.  Some businesses could use the cash method regardless of size. 

Starting in 2018, many businesses that were not allowed to use the cash method in prior years can begin using the cash method if they meet a gross receipts test of $25 million.  The receipts threshold is based on an average of the three prior tax years.   

C Corporations and businesses with inventories are among the types of businesses that will benefit from the increased $25 million revenue threshold.  If qualifications are met, a business can either treat inventories as non-incidental materials and supplies or conform to the taxpayer’s financial accounting treatment of inventories.  

In addition, businesses that were previously required to capitalize certain costs as part of inventory (Section 263A) also are exempted from this provision if they meet the new $25 million revenue test.  

The big benefit? Here’s a simple example:  Say your company currently uses the accrual method of accounting. The year-end balance sheet has $500,000 of receivables and $300,000 of accounts payable and accruals. If you switch to the cash method, the net $200,000 difference from the method change would be deductible in the first year adopted.  

Now is the time to evaluate your potential tax savings and options. These new rules may ease your company’s administrative burden and produce significant tax savings.  

If you have questions, please contact our office. We’re here to help.