The Internal Revenue Service has issued a new ruling that allows many small businesses to change methods of accounting used to report their taxable income.  This guidance allows many businesses that currently report taxable income using the accrual method of accounting to now report taxable income using the cash method of accounting.  This new ruling applies to a variety of businesses including service providers, contractors and certain manufacturers that have gross sales of less than $10,000,000 per year.

The tax accounting methods used by businesses can have a significant impact on the tax they pay.  Businesses using the cash method of accounting generally report revenues when payments from customers are received.  Businesses using the accrual method of accounting report revenues when products are shipped or services are rendered to customers.  Therefore, the cash method can allow businesses to delay the time when they recognize taxable income and therefore defer their tax liabilities. 

The IRS ruling also provides that qualifying businesses no longer need to account for inventories.  This change can simplify tax reporting.  Businesses may still need to account for the cost of product purchased for sale to customers.  They may not, however, need to comply with requirements to account for overhead and other costs that would normally need to be added to the cost of inventoried items.

We have advised a variety of clients regarding their ability to change to the cash method of accounting.  Clients have realized as much as $400,000 of tax deferrals from the change to the cash method of accounting.  We can help you assess whether it makes sense for your business to make this accounting method change.

About DeJoy, Knauf & Blood, LLP

DeJoy, Knauf & Blood, LLP was founded to provide the highest quality accounting, audit, tax and financial consulting services to our clients.  Our primary objective is to assist out clients in achieving their goals.  In order to satisfy this objective, all of our services are provided by experienced professionals with a strong dedication to client service.

All tax services are focused around a comprehensive and proactive planning philosophy developed by continuous efforts to understand our clients’ business and financial objectives.  This approach allows us to identify a variety of tax-planning opportunities and to employ those opportunities in our clients’ best interests.

If you would like more information regarding tax accounting methods for your business, please call Mark Blood, CPA at (585) 546-1840 or e-mail to mblood@teamdkb.com.