AICPA recommends changes in accounting for small-biz taxpayers

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The American Institute of CPAs has sent a set of recommendations to the Internal Revenue Service about accounting methods for small-business taxpayers and how to determine whether a taxpayer qualifies as a small business.

The comments come in response to the IRS’s request in Rev. Proc. 2018-40. The revenue procedure noted that the Tax Cuts and Jobs Act expanded the number of small-business taxpayers eligible to use the cash method of accounting. The TCJA defines a small-business taxpayer as a taxpayer with average annual gross receipts in the prior three-year period of $25 million or less. The AICPA acknowledged that the $25 million threshold is a welcome change for many taxpayers, as previous simplifying provisions with respect to certain accounting methods were generally applicable to taxpayers with average annual gross receipts of $1 million, $5 million or $10 million or less.

For purposes of determining whether a taxpayer qualifies as a small-business taxpayer, the tax law references the existing gross receipts test under Section 448(c)(2) and increases the dollar threshold from $5 million to $25 million. However, if the taxpayer fails the $25 million gross receipts test for a given taxable year, it may not apply any of the simplifying provisions for that taxable year.

The AICPA recommended that the IRS offer guidance on how to apply the gross receipts test to each trade or business of a taxpayer that is not a corporation or partnership.

In its letter, the Institute also said the IRS should confirm the ability to change to the overall cash method for taxpayers meeting the gross receipts test. The AICPA also suggested the IRS should interpret “books and records of the taxpayer prepared in accordance with the taxpayer’s accounting procedures” under Section 471(c)(1)(B) of the Tax Code, clarify Section 460(e)(2)(B) in the context of Rev. Rul. 92-28, and modify the definition of “tax shelter” for purposes of Section 448 to exclude syndicates.

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Accounting methods Cash accounting Tax regulations Small business AICPA IRS