Fall/Winter 2018-2019 | BWD 7
Expanded eligibility for cash accounting
Companies generally use either cash or accrual accounting. The
main difference lies in how revenue and expenses are recorded.
Accrual accounting records revenue when it’s earned and expenses
when they’re incurred. Cash accounting records revenue when
payment is received and expenses when they’re paid (i.e., when cash
changes hands).
In general, cash accounting is simpler. So, it’s no surprise the cash
method is typically used by smaller businesses ($10 million or less),
while accrual is required for large companies.
Under the new law, companies or unincorporated taxpayers with
$25 million or less in average revenue over the past three years can
now use the cash method. This applies to producers and resellers of
personal and real property as well.
Beyond being simpler, using the cash method means businesses
with more in accounts receivable than accounts payable at the end of
the year can defer the difference (taxable income) for tax purposes.
Generally speaking, the higher a company’s profit margin, the
greater this tax benefit can be.
Changes to inventory tax treatment
Tax reform also brought inventory taxation relief to businesses.
Companies with less than $25 million in average revenue no longer
need to capitalize inventory in accordance with IRS “Section 471”
standards. Instead, they can choose to treat inventory as non-
incidental materials and supplies.
Another inventory-related benefit is the removal of “Section 263A”
uniform capitalization or “UNICAP” requirements. These are
additional costs capitalized into inventory for tax purposes above
and beyond requirements of Section 471. They can now be written
off for tax year 2018, though changes to previous years’ inventory tax
calculations may be required.
Savings opportunities are there,
with proper planning
Modifications to the tax code can bring a big ripple effect that
cause businesses to adapt, sometimes drastically. This latest
federal tax overhaul could usher in many changes.
But it also offers opportunities to save substantial amounts of
money. That said, there are a few things to keep in mind.
First, a change in accounting method may be required. These
changes should be filed with 2018 tax returns by the tax return
filing deadline, including extensions. These changes will
generally be considered “automatic” by the IRS and approved
without review.
Also, be mindful of net operating losses (NOLs) when evaluating
tax savings opportunities. Before owners get too excited about
carrying losses back to grab old tax dollars, a review of the law
precludes such action. NOL carrybacks are no longer permitted
with the new tax law. They are carried forward indefinitely and
are limited to offsetting 80 percent of taxable income in a given
tax year.
There are several more provisions to consider for 2018 year-end
tax planning outside of tax accounting method changes. For
instance, how to handle the qualified business income deduction
(“Section 199A”), the expiration of the domestic production
deduction (“Section 199”), and more, should also be addressed.
The new law is complex, and this article covers just some of the
highlights. To take full advantage of the reforms, substantial
research and analysis is required.
Eased long-term contract requirements
Long-term business deals are commonplace for construction
companies, real estate developers and the like. Their projects can
extend months or years, often covering multiple tax years.
When projects end in different years than they began, they’re viewed
as “long-term contracts” by the IRS and generally require use of the
“percentage-of-completion” accounting method.
Beyond being a compliance burden for companies, the “percentage-
of-completion” method also results in slower expense recognition for
tax purposes. However, through the federal tax overhaul, companies
under the $25 million average revenue threshold can now elect not
to use the “percentage-of-completion” method.
That means development costs can be expensed faster, allowing
companies to lower their taxable income. While these new rules
won’t absolve companies of financial reporting requirements, it can
mean substantial tax deferrals for profitable construction contracts.
ABOUT THE AUTHOR
Ryan Bryker is a senior manager with Rehmann’s
tax department. In addition to a variety of tax
consulting services, Ryan provides income tax
planning and preparation services to individuals,
corporations and partnerships. Contact
him today at [email protected].