IRS Releases Guidance on Accounting Method Changes for Small Businesses

On August 3, 2018, the IRS released Revenue Procedure 2018-40, which provides advance guidance for eligible small business taxpayers to apply for certain automatic accounting method changes introduced through the tax reform signed into law by President Trump on December 22, 2017. Rev. Proc. 2018-40 presents an amendment to Rev. Proc. 2018-31 to modify existing automatic changes in methods of accounting in order to implement the legislative changes of the Tax Cuts and Jobs Act (TCJA).  The effective date for this guidance is for taxable years beginning after December 31, 2017.
The TCJA has expanded the number of small business taxpayers eligible to use a cash method of accounting by raising the cap on gross receipts from $5 million (C corporations) or $10 million (partnerships, S corporations, and other flow through entities) to $25 million averaged over the prior three years.  Taxpayers who meet this revenue test are also eligible to use several simplified methods of accounting that exempt them from the requirements to capitalize costs in a number of situations, including:

  • Certain home construction contracts,
  • Uniform Capitalization (“UNICAP”) under Section 263A,
  • Certain long-term construction or defense contracts under Section 460, and
  • Maintenance of inventories under Section 471.

Note that while these accounting methods are meant to simplify the record-keeping and reporting for qualifying businesses, there are situations where applying for simplified accounting treatment may still not be allowable or advisable.
Rev. Proc. 2018-40 provides the procedures by which eligible small business taxpayers may obtain this automatic consent to change their methods of accounting to reflect the statutory changes. To apply for an accounting method change, a taxpayer has to fill out Form 3115 and include many supporting schedules and statements. As a general rule, automatic change applications are included as part of the tax return for the year of change. Accordingly, an application for a 2018 method change will be filed with the 2018 tax return.
More importantly, the Revenue Procedure waives a rule that prohibits an automatic “reversal” of a prior method change for five years. For example, a taxpayer that was forced in 2016 to convert from the cash to accrual method under the old revenue thresholds may convert back to the cash method in 2018. Note, however, this waiver only applies to method changes filed for the 2018 through 2020 tax years.
The procedure also addresses situations when concurrent automatic changes are applied for.  Unfortunately, despite the overall intent to simplify accounting and reporting, the procedures and application for a change remain to be complex and unclear in some cases.
Rev. Proc. 2018-40 also states that the IRS and Treasury Department expect to issue further guidance on this topic and are requesting comments and questions from tax professionals.  AAFCPAs will monitor further guidance and keep you apprised as appropriate.  In the meantime, we encourage small business taxpayers under the expanded $25 million gross receipts threshold to consult with their AAFCPAs tax partner regarding the key considerations and benefits of implementing these changes in accordance with Rev. Proc. 2018-40.
If you have any questions, please contact: Richard Weiner, CPA, MST at 774.512.4078,; Bella Amigud, CPA at 774.512.4060,; or your AAFCPAs Partner.

About the Authors

Bella Amigud
Bella delivers compliance and tax planning solutions for public and privately-held companies, and family-owned businesses in a variety of industries, including: healthcare technology, high tech, software, green tech, clean tech, retail, and private equity.  Her skills are concentrated on federal and multi-state taxation, advising AAFCPAs’ clients on:  understanding the impact of the Tax Cuts and Jobs Act (H.R. 1); physical presence versus economic nexus; state apportionment; tax exposure in relation to FIN 48 financial reporting; and the tax implications of multi-state transactions, such as: mergers, acquisitions, expansions and relocations. Bella advises corporations, S corporations, partnerships, and limited liability companies on issues affecting tax liability.
Rich has over 30 years of broad tax experience with a specialty in tax planning and consulting for private and publicly-held businesses. Rich has specific expertise in the Software, Bio-Technology, Medical Device, Life Science, Manufacturing, Retail, Professional Service and Publishing industries, as well as U.S. aspects of international taxation. He works extensively with European companies expanding into the U.S. market. Additional areas of focus include companies and stockholders in transition, including structuring of and planning for Mergers & Acquisitions, planning for changes in ownership and management, and adoption of tax methodologies with a view toward the long term. He is well known in his field and is a frequent speaker on a variety of tax related topics.