Update on Automatic Consent Procedures for Small Business Accounting Method Changes

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Thanks to the Tax Cuts and Jobs Act (TCJA), enacted on December 22, 2017, small businesses with average annual gross receipts of $25 million or less in the prior three-year period may use the cash method of accounting. Also, these businesses are exempt from certain accounting rules for inventories, cost capitalization, and long-term contracts as noted in an earlier post.

These changes go a long way in simplifying tax compliance for smaller business enterprises and serve to allow these businesses to focus more on operations than tax accounting. The use of the cash method of accounting, in particular, will allow these businesses to match taxable income with the actual flow of cash in their enterprises.

In a recent Revenue Procedure, the IRS clarified that taxpayers seeking to change to one or more TCJA-permitted methods must, if eligible, use the automatic change procedures in Revenue Procedures 2015-13 and 2018-31 (or any successors), as modified. Use of the automatic change procedures will result in reduced filing requirements, thereby allowing a partial Form 3115, Application for Change in Accounting Method.

The Revenue Procedure is generally effective for tax years beginning after December 31, 2017. However, for method changes involving exempt long-term contracts, the effective date for contracts entered into after December 31, 2017, in tax years ending after that same date.

In addition, the IRS has waived the five-year restriction on eligibility for making automatic changes for a taxpayer’s first, second or third tax year beginning after December 31, 2017.

Grossman Yanak & Ford LLP continues to review our clients’ tax methods in evaluating the usefulness of making changes under the TCJA. The recent news confirms our earlier thinking that adopting these changes will be a straightforward process, should the new methods prove advantageous to our clients.

Should you have a question regarding the method change rules under the TCJA or if you wish to offer a comment or question, please contact Bob Grossman or Don Johnston.