Two New Rules from the TCJA That Can Actually Help Small Business Owners

By Mordecai Lerer  |  February 4, 2019

Much has been written (with more to come, I’m sure) lamenting the tax impact that certain provisions of the Tax Cut and Jobs Act have had on small business owners. I’m hearing about domestic manufacturers with overseas operations facing crippling double taxation – and don’t get me started on the changes to the state and local tax deduction limitation of $10,000!

That’s why it’s time for us to focus on the few but important rules in the TCJA that actually favor small business owners – and the time to take advantage of them is right now, as 2018 filing season is in full force. Here are two of my favorites.

There’s a real chance to convert to the cash basis method of accounting for businesses. Yes – in many cases, small business taxpayers can now change to an overall cash method. That’s because of an increase from $5 million to $25 million in the average annual gross receipts test that exempts C corporations and partnerships with C corporation partners from the requirement to use the overall accrual method of accounting. It’s clear to me that many more small businesses will now be able to take advantage of the simplified cash basis method of tax accounting, especially for inventoriable costs – and that’s a good thing in and of itself. 

Capital idea! There is now an exception from the Requirement to Capitalize Costs under Section 263A. The same average annual gross receipts test that has been expanded from $5 million to $25 million now also exempts small resellers from the requirement to capitalize additional Section 263A costs under the uniform capitalization rules (UNICAP). Furthermore, the exemption has been expanded to include both producers and resellers.

It’s a bit of a cliché to say that taking advantage of these two new rules is a no-brainer, but I think that is truly the case. Be sure to check with your tax advisor, but it is worthwhile to move ahead and see if your company can adopt these two changes. In brief, ask yourself: can I meet the $25 million gross receipts test under Section 448(c)? And have I ensured that I am not otherwise prohibited from using the overall cash method (e.g., tax shelter defined in Section 448(d)(3)) or required to use another overall method of accounting?

In most cases adopting at least one of these new method changes will create a potential windfall in the first year of adoption. For instance, if the taxpayer has accumulated 263A costs in their inventory over the years, they can write-off the entire amount in the year of adoption.

And there’s more good news. Both of these changes are eligible for the automatic IRS consent – taxpayers making both of these changes may file a single combined Form 3115 application for several of the method changes. Effective for taxable years beginning after December 31, 2017, these automatic changes are made by attaching the Form 3115, Application for Change in Accounting Method, to the timely filed (including extensions) federal income tax return for the year of the change. Therefore, these changes can still be made for 2018.

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About Mordecai Lerer

Mordecai Lerer, CPA, is a Tax Partner in the Commercial Business Group at Marks Paneth LLP. He has been providing strategic tax and advisory services to businesses and individuals for over 35 years. Mr. Lerer advises clients in the manufacturing, wholesale and distribution sector, as well as the real estate and educational services industries. He also provides tax planning and compliance solutions to personal service businesses and high-net-worth individuals. In this capacity, he handles state,... READ MORE +

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