Richard Beamish of Doeren Mayhew

By Richard J. Beamish, CPA, MST – Shareholder, Doeren Mayhew

As a result of the Tax Cuts and Jobs Act, in general, most taxpayers meeting the new $25 million average gross receipts test for the tax years beginning after Dec. 31, 2017 will get some much needed relief with four new small business tax breaks.

What’s the catch? In order to qualify for one or more of these opportunities outlined below, your business must not have average gross receipts for the three prior tax years of more than $25 million.

1. Uniform Capitalization (UNICAP)

If your business qualifies, you will no longer be required to apply the UNICAP rules to your year-end inventory. This could mean a large tax deduction for your business in the 2018 tax year, due to the fact that you may have a large cumulative UNICAP adjustment that can now be reversed and deducted on your 2018 tax return.

2. Percentage Completion vs. Completed Contract Exception

Eligible contractors currently using the percentage-completion method of accounting on jobs, will now be able to start using the completed-contract method of accounting on all new jobs. Continued use of the percentage-completion method is required for all current open jobs as of Dec. 31, 2017.

3. Cash Method of Accounting

Qualifying taxpayers may be able to switch from an accrual to cash method of accounting with some exceptions. For example, some businesses such as “service” businesses are also eligible to be on the cash basis irrespective of their gross receipts amount.

4. Accounting for Inventories

If your business passes the $25 million dollar test, you may not have to inventory some of your purchases.  However, this exception is a little trickier than the previous three. Below are a couple of examples to help clarify.

  • If you are a retailer (i.e. a hardware store) and have inventory in the traditional sense, you are not allowed to utilize this new exemption.
  • If you are a CPA firm and you purchase bulk items such as paper and toner cartridges, you may expense these items instead of capitalizing such items that are unused at year end.

In order to meet the requirements of this exception, you must either treat these types of expenditures as either non-incidental supplies or materials, or conform to the business’s financial accounting treatment of inventories.

As a small business, looking for any opportunities to reduce tax liabilities is critical, and these new tax breaks may help your business do just that. However, you will need to file a Form 3115, Change in Accounting Method, to initiate the process for each change related to all four of the opportunities, and file it with the consent of the Internal Revenue Service.

To find out if your business will benefit from applying  any of these changes to your business’s accounting methods, contact us today.

Want to reach the author? Email Richard Beamish or contact him at 248.244.3005.