August 3, 2018 the IRS released Revenue Procedure 2018-40 regarding changing accounting methods because of last year’s Jobs Act. This is another attempt to simplify the lives of small business taxpayers. Unfortunately, it is complicated before it gets simpler.
Who is eligible? Taxpayers with average revenues for the 3 prior years of $25 million or less that are currently using the accrual method accounting may change back to the cash method of accounting for taxable years beginning after December 31, 2017.
Companies that changed to the accrual method in prior years have historically not been allowed to change methods of accounting again for 5 years. The new Revenue Procedure 2018-40 waives that rule at Section 3, Part 6 for any change to the cash method, or away from using Section 263A inventory capitalization, for changes in the 1st, 2nd or 3rd tax year beginning after 12/31/2017.
The change to the cash method is an automatic approval change if the taxpayer correctly files Form 3115. Using the change code “233” the taxpayer will need to file 2 copies of Form 3115, no later than the extended due date of the 2018 return. The taxpayer changing back to cash (or continuing to use the cash method) must still account for inventories, meaning inventory is still not deductible until the later of the date sold or paid for.
Finally, if a taxpayer is also changing away from the use of 263A inventory capitalization and/or accounting for inventory, they may combine all 3 changes in 1 Form 3115. Make sure to use the latest version of Form 3115 (December 2015 as of today), write the appropriate Revenue Procedures at the top, and file in duplicate.
Please contact us with help with filing these forms for you.