The IRS has issued proposed regulations to implement changes to simplified tax accounting rules for small businesses enacted by the Tax Cuts and Jobs Act (TCJA).

The TCJA modified provisions in the Internal Revenue Code that allow businesses with annual incomes below a certain level to account for income and expenses differently than businesses that exceed the thresholds.

The small business exemptions apply to:

  • Use of the cash method of accounting
  • Uniform capitalization rules
  • Inventory accounting rules
  • Percentage-of-completion accounting for long-term contracts

Before the TCJA, certain taxpayers could qualify for these exemptions if their average annual gross receipts for all prior taxable years did not exceed certain levels. The TCJA raised the threshold for this gross receipts test to $25 million, indexed to inflation, and shortened the calculation period to the three taxable years ending immediately before the current year. It also applied the same gross receipts test to all the exemptions.

The proposed regulations modify existing regulations to apply the new single gross receipts test for tax years beginning after December 31, 2017. For tax years beginning in 2019 and 2020, these simplified rules apply to taxpayers with inflation-adjusted average annual gross receipts of $26 million or less. (Taxpayers classified as tax shelters cannot use the simplified rules even if they meet the gross receipts test.)

The proposed regulations also implement certain other changes to the small business accounting rules for inventory and long-term contracts that were necessitated by the TCJA’s repeal of the corporate alternative minimum tax and enactment of the base erosion and anti-abuse tax (BEAT).

For more information about changes to small business tax accounting rules enacted by the TCJA, please contact your CRI tax advisor.