2017’s Tax Cuts and Jobs Act (TCJA) was filled with headline-grabbing changes like lower tax rates for corporations and individuals, a 20% deduction for qualified income from pass-throughs, and the elimination of the corporate alternative minimum tax (AMT). But the TCJA also included some fairly generous gifts in the form of expanded availability of existing tax breaks for small businesses.
The law made several new and existing provisions available to businesses with average gross receipts of up to $25 million. The IRS defines “gross receipts” as total amounts received from all sources during an annual accounting period without subtracting expenses. “Average gross receipts” refers to the average of the business’s last three taxable years.
Here’s a quick overview of the provisions benefiting from this expanded availability:
For many businesses, these provisions mean that the tax breaks and incentives designed to support them in the early stages of the business life cycle will now help them continue growing into maturity. The provisions deliver the following benefits to qualifying businesses:
- Cash method of accounting: For some corporations, this method of accounting can simplify recordkeeping and tax filing.
- Simplified inventory accounting: Smaller businesses can choose to deduct inventory when the item is provided to the customer. This flexibility helps with managing accounting for inventory and cost of goods sold at year-end.
- UNICAP exception: By now, you’ve probably learned that when your accountant talks in acronyms, it’s usually bad news for your business. According to UNICAP (uniform capitalization) rules, certain direct and indirect costs associated with real or tangible personal property must be either capitalized or included in inventory. By increasing the threshold for this requirement, the TCJA allows more businesses to take advantage of current-period expensing for these costs.
- Percentage of completion method: The TCJA also increased the threshold for the percentage-of-completion method of accounting from $10 million to $25 million. For construction businesses, the percentage-of-completion method of accounting can lengthen the time it takes to recover costs. Extending the exemption allows these growing businesses to maintain a faster pace of cost recovery and helps keep their taxes lower as they grow into maturity.
- TCJA interest expense limitation: The new law limits the amount of interest that businesses can expense to 30% of adjusted taxable income. Exempting businesses below $25 million in gross receipts allows start-ups and growing companies more freedom to deduct interest at a time in their life cycle when debt may be more of a necessity.
Elect to Take Advantage of Small Business Tax Breaks
Some estimates suggest that over 3 million American businesses could benefit from the expansion of these tax breaks to the $25 million level. If your business is affected, you should be working with your tax advisor to determine what, if any, accounting changes you need to make for 2018 and beyond. The changes listed above are expected to be “automatic” method changes, meaning that your business may be able to take advantage of them on its 2018 return. However, don’t delay. If your business comes under audit before then, it may be subject to restrictions on accounting method changes.
For more information on how your business can benefit from these changes, please contact your CRI tax advisor.