The use of the cash method of accounting for tax purposes has become available to more taxpayers due to the Tax Cuts and Jobs Act of 2017 (TCJA). Where previously a taxpayer’s use of the cash basis method of accounting for tax purposes was limited, new opportunities exist.
Potential benefits of converting to the cash basis method of accounting include:
- Improved cash flow opportunities
- Decreased tax burden for the current year
- Simpler to implement and maintain
- Allows for better matching of available cash and income for tax payments
- Any business entity that is not a C corporation or a partnership with a C corporation partner and does not carry inventory
- C corporations and partnerships with C corporation partners which carry inventory and have average annual gross receipts not exceeding $25 million for the prior three years
- C corporations or partnerships with a C corporation partner which engage in the trade or business of farming or select personal service corporations
Taxpayers who may benefit from an accrual to cash basis accounting method change:
- C corporations and partnerships with C corporation partners with $25 million or less in gross receipts
- Taxpayers whose accounts receivables exceed their payables
- Producers and manufacturers not previously permittted to use the cash method of accounting
Taxpayers that qualify for a change from the accrual to cash method of accounting may apply to use the cash method under the automatic consent procedures by filing Form 3115 with the Internal Revenue Service. It is important to note that Tax Shelters are prohibited from using the cash method of accounting. Tax Shelters are companies that meet one of the following three criteria: 1) an enterprise other than a C corporation with interests offered for sale in any offering requiring registration with a federal or state securities agency, 2) a syndicate, or 3) a partnership or other entity whose significant purpose is to avoid or evade federal income tax.