The Tax Cuts and Jobs Act adjusts the gross receipts threshold for when certain entities are required to use the accrual method of accounting.

Prior Law

Through December 31, 2017

Under pre-Act law, a corporation, or a partnership with a corporate partner, may generally only use the cash method of accounting if, for all earlier tax years beginning after December 1985, the corporation or partnership met a gross receipts test – i.e., the average annual gross receipts for the three tax year period ending with the earlier tax year does not exceed $5 million. Also under pre-Act law, farm corporations and farm partnerships with a corporate partner may only use the cash method of accounting if their gross receipts do not exceed $1 million in any year.

New Law

Effective for tax years beginning after December 31, 2017

The cash method may be used by taxpayers that satisfy a $25 million gross receipts test, regardless of whether the purchase, production, or sale of merchandise is an income-producing factor. Under the gross receipts test, taxpayers with annual average gross receipts that do not exceed $25 million for the three prior tax years are allowed to use the cash method.

Commentary

The exceptions from the required use of the accrual method for qualified personal service corporations and taxpayers other than C corporations are retained. Accordingly, qualified personal service corporations, partnerships without C corporation partners, S corporations, and other pass-through entities are allowed to use the cash method without regard to whether they meet the $25 million gross receipts test, so long as the use of the method clearly reflects income.

This article was written by: Matt Cantlon, CPA

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Lance Campbell
Lance Campbell
I am the partner-in-charge of the Rochester, MN office. I provide tax services to individuals, businesses and agricultural clients. I also provide compilation services and am QuickBooks Certified ProAdvisor.

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