Tax Cuts and Jobs Act – Uniform Capitalization UNICAP
The Tax Cuts and Jobs Act (TCJA) of 2017, signed into law in December 2017, brought significant changes and tax reform for businesses and individuals. Included among the many changes are some favorable provisions offering benefits to small businesses with respect to accounting method reform and simplification. These new provisions, effective for tax years beginning after December 31, 2017, include changes to the availability of the overall cash method of accounting, changes to methods for accounting for inventories and exempting additional producers or resellers from the application of the Uniform Capitalization (UNICAP) rules.
Prior to the TCJA, limitations applied to C corporations (or a partnership with a C corporation as a partner), whereby these taxpayers were prohibited from using the cash method of accounting for tax purposes unless their annual average gross receipts pursuant to IRC Section 448(c) for the past three years were less than $5 million. Under the TCJA, effective for tax years beginning after December 31, 2017, the gross receipts threshold was increased to $25 million (indexed for inflation) regardless of the entity type or industry of the taxpayer.
Prior to the TCJA, Treasury Regulation 1.446-1(c)(2) required the accrual method of accounting for taxpayers required to maintain inventory records. Exceptions to the inventory requirement were taxpayers with inventory that had average annual gross receipts of $1 million or less regardless of their trade or business and for taxpayers with certain eligible trades or businesses with average annual gross receipts of $10 million or less whereby inventories were treated as “non-incidental materials and supplies” pursuant to Treasury Regulation Section 1.162-3. Under the TCJA, effective for tax years beginning after December 31, 2017, taxpayers with average annual gross receipts of $25 million or less (indexed for inflation) are not required to account for inventories and have the option to either; treat the inventories as non-incidental materials and supplies, or conform to the taxpayer’s financial accounting treatment of inventories, or if the taxpayers doesn’t have an applicable financial statement, the taxpayer conforms to the books and records prepared in accordance with the taxpayer’s accounting procedures.
Prior to the TCJA, under the UNICAP rules a taxpayer was required to either include in inventory or capitalize certain direct costs, and to allocate a portion of their indirect costs related to real or tangible personal property either produced by the taxpayer or acquired by the taxpayer for resale. Resellers were exempt from the capitalization requirement if their average annual gross receipts were $10 million or less. Under the TCJA, effective for tax years beginning after December 31, 2017, taxpayers with average annual gross receipts of $25 million or less (indexed for inflation) are not subject to the UNICAP rules. This is now effective for both manufacturers and resellers of real and personal property.
Revenue Procedure 2018-40 was recently issued to provide the procedures by which a small business with gross receipts of $25 million or less may obtain automatic consent to change its method of accounting for the items referred to above to a new method established under the TCJA. These new methods are also subject to reduced filing requirements, in that only a partial Form 3115, Application for Change in Accounting Method, needs to be filed.
If you would like to discus the impact of the TCJA of 2017 on your business and the new accounting methods available, please contact John F. Martin, CPA/PFS, CFP® or the Tax Partner on your account at Dannible & McKee, LLP.