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The tax reforms impact on small business’ accounting

It has been nearly one year since President Trump signed the Tax Cuts and Jobs Act. Back then, we initially discussed a couple of major points of how the new law would small businesses, which include the lowering of corporate taxes and a new deduction for pass through businesses. However, more has become clear since then, with the IRS providing guidelines and analysis of the matter, particularly in regards to the cash method of accounting.

The cash method of accounting

Generally speaking, the new law allows small businesses to use the cash method of accounting. Here is a list of how this change can affect small businesses:

  • It expands the number of small businesses to use the aforementioned cash method of accounting by raising the annual average gross income to $25 million from the previous level of $5 million per year. This is indexed for inflation.
  • It also allows those small businesses $25 million and under for the three previous years to use the cash method of accounting as long as it is not a tax shelter.
  • Small businesses are now exempt from certain accounting guidelines for determining inventory, cost capitalization and long-term contracts.

There is now a process by which small businesses that are eligible can automatically obtain consent to change to this accounting method.

Good news for businesses

The good news is that these accounting and tax changes have spurred and will likely continue to spur the economic growth of businesses. Nevertheless, those businesses with questions about compliance and understanding how these tax laws will impact all aspects of a business would be advised to speak with an attorney with business law experience.

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