March 8, 2021 - Douglas Myser

Simplified accounting for small business. The IRS  finalized updates to various accounting regulations to adopt the simplified tax accounting rules for small businesses enacted by the law known as the Tax cuts and Jobs Act, P.L. 115-97. The regulations finalize proposed regulations issued with a few changes in response to comments that were made. For tax years beginning in 2020 and 2021, these simplified tax accounting rules apply for taxpayers with inflation adjusted average annual receipts of $26 million of less. Taxpayers classified as tax shelters are prohibited from using the simplified rules even if they meet the gross receipts test. The final regulations, however, have a special election for certain entities classified as tax shelters. In the preamble, the IRS explained that it was aware of being defined as a tax shelter for a tax year. Simplified accounting for small business.

To address these concerns, the final regulations modify the election for syndicates by making the election an annual election instead  of permanent, as had been proposed. A syndicate is generally a business in which more than 35% of the losses during the tax year are allocable to limited partners or limited entrepreneurs. An annual election balances the statutory language with the consistency requirements for using a method of accounting under Sec. 446(a) and Regs. Sec. 1-446-1, the IRS says. Simplified accounting for small business.

A cash method taxpayer that is generally profitable year to year may experience an unforeseen taxable loss for an anomalous year but return to its profitable position in subsequent years. IF the taxpayer allocated more than 35% of the taxable loss to its limited partners or limited entrepreneurs, the taxpayer would be require to change from the cash method to another method for the tax year under Sec. 448 (a)(3). That taxpayer would otherwise not be prohibited from using the cash method in the next tax year when it was again profitable. An annual election under final Regs. Sec. 1-448-2 (b)(2)(3)(B) allows a taxpayer to elect in the loss year to use the allocated taxable income or loss of the immediately preceding tax year to determine whether the taxpayer is a syndicate for the current tax year.

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