Change in Method Due to New Tax Law
As a result of the new tax law that was enacted on December 22, 2017, there are new rules governing when a taxpayer must use the accrual basis of accounting.
Effective for tax years beginning after December 31, 2017, taxpayers with gross receipts of $25 million or less are no longer required to use the accrual basis of accounting, even if they have inventories. For this purpose, gross receipts means the average gross receipts for the prior three tax years.
The IRS recently released Revenue Procedure 2018-31, which allows taxpayers with gross receipts of $25 million or less to change their accounting method to reflect these new rules, and the IRS will grant an automatic consent to such a change. Note: Even with the automatic consent, taxpayers must still file Form 3115, Application for Change in Accounting Method, in order to make such a change in accounting method.
Practitioners may have clients who would benefit from this new provision. If a client has used the accrual basis of accounting in the past, due to having inventories, and the client’s gross receipts are $25 million or less, the client might benefit from changing its basis of accounting.
Note: While such a client would be eligible to stop using the accrual basis of accounting and begin to use the cash basis, the client would still be required to account for the cost of inventory as non-incidental materials or supplies. This means that the cost of such materials or supplies generally cannot be deducted until they are sold or used.