Business owners are now reviewing the repercussions of the Tax Cuts and Jobs Act of 2017 or are planning to do so soon. Learning about how these changes will affect your business is an important step to take now in strategic business and tax planning for the years to come. While the majority of the Act’s key criteria are beneficial to businesses, there are several changes that affect only certain types of businesses, and other changes that affect the overall method of accounting a business can use. Perhaps one of the most significant changes made in the new tax overhaul is that more businesses can utilize the cash method of accounting.
Cash Method of Accounting
Cash method of accounting goes by numerous aliases such as cash-basis accounting or cash accounting and is simple to understand. Under cash method of accounting, a business records revenue when cash is received and records expenses when cash is paid. Accrual method of accounting, on the other hand, allows a business to record revenue as soon as it is earned. While there are several other types of accounting, these are two of the most common.
More Businesses Can Use Cash Method of Accounting
In the past, the IRS has generally discouraged the use of Cash Method of Accounting; however, with the new changes to the tax law, more business can take advantage of this form of accounting. Previously, business qualified for this form of accounting only with average gross receipts of $5 million or less over the previous three years. Now, the new threshold is increased to $25 million over the previous three years. Accordingly, this change applies to both C corporations and Partnerships with C corporation partners. As an example, this change to the tax code stands to benefit construction companies who are C corporations with less than $25 million in annual revenue who previously utilized the percentage of completion method.
Advantages of Cash Method of Accounting
When considering tax planning, cash method of accounting offers several advantages, with one of the key protections being the option of accelerated payment of business expenses before year-end. This allows business owners to maximize their tax deductions in certain situations. Additionally, the cash method is relatively simple to implement and maintain. Also, cash method of accounting gives business owners the power to ensure funds are available for tax payments. This can be an enormous advantage for companies with restricted or uneven cash flows.
By and large, the Tax Cuts and Jobs Act of 2017 stands to benefit businesses who are proactive and who develop an action plan as soon as possible. You should also ask your professional accountant what method of accounting your business is currently using and if changing to cash method accounting is in your best interest. Once you have weighed your options, you’ll need your accountant’s assistance in making a change from accrual to cash methodologies, and they can help you answer the extensive IRS questionnaire regarding business activity that is necessary to perform the switch, as well as ensure your form 3115 which requests a change in your overall method accounting is filled out and filed properly. Contact your Lawhorn CPA Group team member today to find out how your business can benefit from the new tax laws.
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