U.S. Tax Reform (Part 5) Accounting changes

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On December 22, 2017, President Trump signed into law the U.S. tax reform legislation, also known as the Tax Cuts and Jobs Act. This new legislation includes major changes to the previously existing tax system and will affect both businesses as well as individuals. 


Generally, the new legislation applies for tax years beginning after December 31, 2017. The IRS is working to develop guidance regarding the implementation of the U.S. tax reform legislation and publishes statements as it becomes available. Below are the highlights of the new corporate tax provisions which may have an impact on your business.
 

Accounting changes

Cash accounting method
Under prior law, the use of the cash method of accounting was limited to corporations or partnerships with a corporate partner with average annual gross receipts under $5 Million. With the U.S. tax reform Act, most U.S. corporations with average annual gross receipts under $25 million will now be able to use the cash method of accounting. Some limited exceptions may be applicable.
Similarly, the threshold to account for inventory (and also use the accrual accounting method) has been increased to $25 million of average annual gross receipts instead of $1 million ($10 million in certain industries). These businesses will also be able to use the cash accounting method. Note that a change to the cash accounting method will be regarded as a voluntary change in the taxpayer’s accounting method and a request will need to be filed with the IRS.

Capitalization of indirect costs into inventory
Under prior law, the uniform capitalization (UNICAP) rules required the capitalization of some direct and indirect costs into inventory for businesses with average annual gross receipts over $10 million. This threshold has been increased by the U.S. tax reform Act to $25 million in average annual gross receipts. Note that a change to the treatment of costs into inventory will be regarded as a voluntary change in the taxpayer’s accounting method and a request will need to be filed with the IRS.

Long Term Contract
Under prior law, the percentage of completion method for long term contracts was required for businesses with average annual gross receipts over $10 million. Certain businesses with average annual gross receipts not exceeding $10 million could apply the completed contract method for contracts expected to be completed within two years.

The U.S. tax reform Act increases the aforementioned threshold to $25 Million.

 

Authors: Antoine Guillaud, Ben Troch, Pierre Arrouy

Chicago January 31st 2018

 

This article only includes general information and IMS is not, by means of this article, rendering any tax, legal or other professional services. This communication should not be relied upon for any decision or action that may have an impact on your business. Prior to taking any action, you should be in contact with your advisor.