The IRS published final regulations on the small-business taxpayer provisions under IRC Sections 448, 263A, 460, and 471 on Jan. 5. These changes, which were enacted as part of the Tax Cuts and Jobs Act of 2017, provide simplified tax accounting methods for certain small businesses. The final regulations generally adopt the proposed regulations published on Aug. 5, 2020. However, the final regulations make the following important changes.
Small-business taxpayer exception
Under IRC Section 448, small businesses with a $25 million or less three-year average of gross receipts (small-business taxpayer exception) are permitted to use the cash method of accounting. This threshold was indexed for inflation and stands at $26 million for taxable years beginning in 2020 or 2021. Taxpayers that meet the small-business taxpayer exception under IRC Section 448 also may use the following simplified methods of accounting:
- In lieu of applying the rules under IRC Section 471(a), taxpayers may account for inventories either as nonincidental materials and supplies (NIMS) or as conforming to their applicable financial statements (AFS) (or books and records if a taxpayer does not have an AFS).
- Taxpayers may forgo the capitalization of additional costs to property produced or acquired for resale under IRC Section 263A.
- Taxpayers may be exempt from the requirement to account for long-term contracts under the percentage-of-completion method under IRC Section 460.
In addition, the gross receipts tests under IRC Section 448 is used to provide special rules for small businesses in other sections of the IRC, such IRC Section163(j) regarding the limitation on business interest.