IRS Grants Automatic Consent to Cash Accounting Method Changes for Small Businesses

The IRS will provide automatic consent when a small business taxpayer asks to change to the cash method of accounting. Small business taxpayers are most corporations and partnerships with average annual gross earnings of $25 million or less during the last three years.

Before this year, most corporations, partnerships with corporate partners, and tax shelters had to use the accrual method of accounting once their annual gross earnings reached $5 million. However, the Tax Cuts and Jobs Act (P.L. 115-97) increased the earnings ceiling to $25 million. Thus, many more taxpayers are now eligible to use the much simpler cash method of accounting.

Automatic Consent Changes

Small business taxpayers may use the automatic consent procedures for five accounting method changes:

  • switching from the overall accrual method to the overall cash method of accounting;
  • opting out of UNICAP for certain costs, including self-constructed assets;
  • accounting for inventory as non-incidental materials, or using the method used for applicable financial statements;
  • replacing the percentage-of-completion method for long-term construction contracts; and
  • stopping UNICAP for home construction contracts.

Pending Applications

An eligible small business that already filed a Form 3115 for one of these changes may convert the pending application to the automatic consent procedures by notifying the IRS before:

  • September 2, 2018, or
  • if later, when the IRS issues a letter ruling that grants or denies the change.

The taxpayer must also submit a new Form 3115 under the automatic consent procedures.

Comments Requested

Finally, the IRS requests comments on these and related changes, including:

  • how the gross receipts test applies to each trade or business when a taxpayer is not a corporation or a partnership;
  • what financial records are sufficient for inventory accounting; and
  • accounting method changes when a single trade or business has both exempt and non-exempt long-term contracts.

IR-2018-160; Rev. Proc. 2018-40

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All stories by: CCHTaxGroup