March 1, 2021 - Douglas Myser

Simplified accounting rules for business. The IRS has finalized updates to various tax accounting regulations to adopt the simplified tax accounting rules for small business enacted by the tax law known as the Tax Cuts and Jobs Act. The Regulations issued in July with a few changes in response to comments. For years beginning in 2020 and 2021, these simplified tax accounting rules apply for taxpayers with inflation adjusted average annual gross receipts of $26 million or less (known as the gross receipts test). Tax shelter annual election. 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 the adverse effects of being defined as a tax shelter under Sec. 448(d)(3) for a tax year. 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 requirement for using a method of accounting under Sec. 446(a) and Regs. Sec. 1.446-1, the IRS says. Simplified accounting rules for 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. Those experiencing loss may need tax resolution services.  If the taxpayer allocated more than 35% of the taxable loss to its limited partners or limited entrepreneurs, the taxpayer would be required to change from the cash method to another method for the anomalous year under Sec. 448(a0(3). However, that taxpayer would otherwise not be prohibited from using the cash method in the next tax year when it was profitable. An annual election is allowed under final Regs. 1.448-2(b)(2)(3)(B).

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