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Did You Know: The Availability of the Cash Method of Accounting Expanded for Small Businesses?

February 28, 2018 | Mitch Estling

Did you know:

Beginning in 2018, the average annual gross receipts threshold for businesses to use the cash method increases from $5 million to $25 million.

Now that you know – here’s what it means!

Under the cash method of accounting, companies do not recognize income until actually or constructively received—regardless of whether the purchase, production, or sale of merchandise is an income-producing factor.

Additionally, small businesses who meet the $25 million gross receipts threshold are not required to account for inventories and are exempt from the uniform capitalization rules (UNICAP). The $25 million is indexed for inflation for tax years beginning after 2018. For businesses with $25M of average gross receipts or more, the deduction for interest expense may be limited to 30% of adjusted taxable income per year.

And here are the details:

The gross receipts threshold that exempts certain taxpayers (C corporations, partnerships with C-corporation partners and tax shelters) from the requirement to use accrual method of accounting was increased under the tax reform bill from $5 million under current law to $25 million.

Taxpayers normally subject to sections 471 and 263A (e.g., producers/resellers of tangible property) are now exempt if they can meet the gross receipts test of $25 million under section 448 (consistent with the exemption from using the accrual method of accounting). Accordingly, taxpayers that fall under the gross receipts threshold will not have to compute section 263A, and can treat inventory as non-incidental materials and supplies (i.e., deduct in the year the materials and supplies are used/consumed), or conform to the taxpayer’s method of accounting reflected in an applicable financial statement or books and records.

Need help understanding how these changes will impact you or your business? Start Here.

We’re excited to bring you thought leadership as we spotlight and highlight key contributors throughout our firm. And the knowledge doesn’t end here. Check back each month for new content that will include industry trends, thoughtful advice, and details about how BerganKDV and our team of experts can be the resource you need. If you’re looking for professional services the Midwest way, start here!

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