Accounting Method Changes for Small Business Taxpayers
Recently, the IRS and Treasury released two revenue procedures on accounting method changes for small business taxpayers. Rev. Procs. 2022-9 and 2022-14 enable small business taxpayers, not a tax shelter, to obtain automatic consent to change to simplified methods of accounting, i.e., cash method of accounting.
These changes:
- Modify existing automatic method changes;
- Add several new automatic changes, and;
- Contain transition rules to switch from one method to another.
The simplified methods applicable to qualifying taxpayers with average annual gross receipts in the three prior years of $26 million or less, include:
- Overall cash method of accounting;
- Simplified accounting for inventory;
- Exemption from accounting for uniform capitalization of costs to inventory (IRC Section 263A), and;
- Completed contract method of accounting for construction contracts.
What do I need to know?
The scope of a change from an accrual accounting method to the cash method for exempt, long-term construction contracts is expanded to include using an accrual method for purchases and sales of inventories and the cash method for computing all other items of income and expense.
Procedures are also provided to revoke a syndicate election made under the proposed small business taxpayer regulations.
These changes also expand the cash method of accounting and grant exemptions use to take inventory from capitalizing costs, under the uniform capitalization rules (UNICAP), from the required use of the percentage-of-completion method for certain exempt, long-term construction contracts or from the requirement to capitalize costs for home construction contracts.
This will give small business taxpayers more opportunity and flexibility to change between non-small business taxpayer methods and small business taxpayer methods as their circumstances change. They will also be able to utilize small business taxpayer methods after being disqualified within the past five years.
For example, if within the prior five tax years a taxpayer made a change from a small business taxpayer method to a non-small business taxpayer method, the prior change is disregarded for determining whether the taxpayer has made a change for the same item in the past five years.
How do I make the change?
An automatically-approved method change request is filed on Form 3115. It is effective as of the first day of the tax year of the return filed. This presents an opportunity to potentially take advantage of tax planning after the tax year has ended and before the return is filed.
How do I benefit?
It is important for all qualifying small business taxpayers to assess their current methods of accounting for tax purposes and consider if the final regulations offer an opportunity to defer income, accelerate expenses, and/or increase efficiency and understanding of their business’ taxable income.
Details about these changes may be found on The Tax Advisor. Because this is a complicated change, we recommend you contact us to help you assess your situation and determine what you should do.