While it may feel, given the current state of the world, that it’s been about 15 years since the groundbreaking TCJA passed, in all reality it has been just shy of three years. In terms of tax law that makes it still just a baby, in need of several regulations and clarifications from the already-overloaded IRS. Recently, proposed regulations were published regarding one of the more taxpayer favorable adjustments to the code, which can allow several distinct benefits if a business’s or group of business’s gross receipts (revenue) is less than a certain dollar amount.
The proposed regulations address the gross receipts tests to Code sections 263A (UNICAP), 448, 460, and 471. In the interest of not completely putting my audience to sleep, I will avoid the code sections for the rest of this blog, but just know that these changes impact several aspects of the Code which apply to more taxpayers than you might think.
Before TCJA, the aforementioned rules had separate dollar thresholds before certain (usually unfavorable) provisions kicked in. For example, you were required to capitalize part of your carrying costs into inventory if your average annual gross receipts (AAGR) for the past 3 years exceeded $10 million. If you were a C Corporation, or a partnership with a C Corporation as a partner, you could not use the cash method of accounting for tax purposes (generally viewed as a favorable treatment) if your AAGR was in excess of $5 million. If you are a construction contractor who wanted to use the completed contract method (picking up revenue when the long-term job is complete, and not ratably over the years in line with costs incurred), you needed to be under $10 million AAGR. If you weren’t confused before, you didn’t need to account for inventory if your AAGR was less than $1 million.
These regulations work to ease the burden on taxpayers and preparers in that all the tests now are based on a fixed dollar amount, adjusted for inflation. The base amount started for the 2018 reporting year at $25 million, and for 2019 was adjusted to $26 million. The IRS will publish annually the inflation adjusted amounts for the next tax year sometime in the Winter before tax filing season begins.
A key item to note is that the rules require you to aggregate certain businesses gross receipts if your ownership is over a certain limit. For example, I cannot simply split up my businesses that I own 100% into two separate entities with AAGR of $24 million and $6 million – they would be combined to have AAGR of $30 million, which would lead to me failing the Small Business test.
In several cases, Henry+Horne has worked with clients to determine that they meet the tests for a small business and have worked to elect a change in method of accounting, sometimes to great taxpayer benefit. In a time when cash can be scant, a simple change in accounting method can result in a very advantageous tax situation.
Please contact us for further consideration if you feel these rules may apply to you.
Brock R Yates, CPA, MT