Adopt a More Favorable Accounting Method: The cash method of accounting, which allows you to recognize sales when cash is received, is attractive to many small businesses due to its simplicity. Due to the new tax law, for tax years beginning after 2017, the ability to use the cash method is greatly expanded. Any entity (other than a tax shelter) with three-year average annual gross receipts of $25 million or less can use the cash method regardless of whether the purchase, production, or sale of merchandise is an income-producing factor. Likewise, C corporations and partnerships with C corporation partners can use the cash method if they meet the $25 million gross receipts test.
Under the old rules, if the purchase, production, or sale of merchandise was an income-producing factor, inventories were required to be maintained, and the cash method wasn’t allowed unless the taxpayer met a $1 million gross receipts test or a $10 million gross receipts test (which only applied if the taxpayer’s principal business activity was an eligible activity). Also, for years beginning before 2018, C corporations and partnerships with a C corporation partner with average annual gross receipts over $5 million couldn’t use the cash method.
Now that the rules have changed, your business may be eligible to adopt the cash method of accounting. Since the $25 million gross receipts test is made on a year-by-year basis, we can monitor whether your average annual gross receipts fall below the threshold. If they do, we can discuss the pros and cons of changing your accounting method. If you do decide to move forward with the change in accounting method, we can prepare the change in accounting method applications for IRS filing.