Tax Cuts and Jobs Act: Here’s how tax reform changed accounting methods for small businesses

November 29, 2018

The Tax Cuts and Jobs Act — better known simply as tax reform — allows more small business taxpayers to use the cash method of accounting. The new law defines a small business taxpayer as a taxpayer who has average annual gross receipts of $25 million or less for the three prior tax years and is not a tax shelter.

Here’s how tax reform changed the rules for small business taxpayers. The law:

• Expands the number of small business taxpayers eligible to use the cash method of accounting by increasing the average annual gross receipts threshold from $5 million to $25 million, indexed for inflation.

• Allows small business taxpayers with average annual gross receipts of $25 million or less for the three prior tax years to use the cash method of accounting.

• Exempts small business taxpayers from certain accounting rules for inventories, cost capitalization and long-term contracts.

• Allows more small business taxpayers to use the cash method of accounting for tax years beginning after December 31, 2017.