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Tax Cuts & Jobs Act: What does it mean for accounting methods?

In addition to sweeping tax changes, the TCJA also brought with it a number of important new guidelines that will impact accounting methods, learn more in this article.

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In addition to sweeping tax changes, the TCJA also brought with it a number of important new guidelines that will impact accounting methods, learn more in this article.

The passing of the Tax Cuts & Jobs Act (TCJA) at the end of 2017 was a tremendously important development that brought with it several changes that will impact businesses in every industry. The sweeping, at-times-contentious bill brought with it dozens of unprecedented changes to the federal tax code, a set of statutory laws that, frankly, hasn’t been seriously altered in years.

These changes immediately forced individual taxpayers, business leaders and owners and—perhaps more than anyone—professional accountants like myself to rethink their strategies and best practices. My colleagues at blumshapiro have written extensively about the bill, taking deep dives to address issues from new regulations pertaining to meals & entertainment tax deductions to whether the TCJA will impact the behavior of charitable donors.

In addition to all of these sweeping tax changes, however, the TCJA also brought with it a number of important new guidelines that will impact accounting methods.

Here are a few of those changes accountants across the industry are preparing for.

Cash method of accounting

Overview: The cash method of accounting—also known as cash-basis accounting—is a practice businesses use that allows them to recognize incoming cash and outgoing expenses as they are made. It’s a popular method often used by smaller businesses, as it can be simpler than the accrual method, which forces businesses to recognize income as it’s earned and expenses as they’re incurred.

The important change: Under the old tax code, businesses (specifically, corporations and partnerships) were permitted to utilize cash-basis accounting only if their average gross receipts did not exceed $5 million. The TCJA increases that limit to $25 million, opening up the cash-basis method to more businesses.

Uniform capitalization

Overview: As defined by the IRS, uniform capitalization (UNICAP) rules “require the capitalization of all direct costs and certain indirect costs allocable to real property and tangible personal property produced by the taxpayer.” The previous law included an exception related to personal property acquired for resale, exempting businesses with less than $10 million in average annual gross receipts from UNICAP rules.

The important change: The change brought into effect by the TCJA is simple: The UNICAP exemption was increased to include businesses with $25 million or less in average annual gross receipts. Plus, the exemption would apply to both real and personal property acquired for resale.

Accounting for inventories

Overview: Any business model in which the production or sale of merchandise is considered a primary income generator typically requires the implementation of inventory methods of accounting. Depending on the size and scope of the business, inventory accounting methods include simple identification; first in, first out; last in, first out; and weight average methods.

Under the previous federal tax code, businesses using any of these methods would nearly always be required to also use the accrual method of accounting to track their income and expenses. The exception, under the old law: Businesses with average gross receipts of less than $1 million would be permitted to account for inventory as “non-incidental supplies.”

The important change: We mentioned this earlier, but it applies here as well: The TCJA now allows businesses with average gross receipts of up to $25 million to use the cash method of accounting. This means more businesses will be permitted to recognize their inventory as “non-incidental materials and supplies” on their tax returns.

These are just a few of the many TCJA-related changes that are impacting how businesses and accountants address financial and tax reporting. For more insight and information related to the Tax Cuts & Jobs Act, visit our website here.

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

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