One University Plaza • Youngstown, OH 44555 • 330.746.3350 • Fax: 330.746.3324 |
WASHINGTON - Senator Kit Bond today applauded the Internal Revenue Service's new cash accounting rules as "a momentous step forward" for small
business taxpayers. Under the new simplified accounting rules, most small-service providers with average gross receipts of $10 million or less will be allowed to use the cash method of accounting rather than costly and time-consuming accrual
and inventory methods. The new rules should result in significant tax simplification for more than half a million small firms, said Bond, Ranking Member of the Senate Committee on Small Business and Entrepreneurship. They also would cover a
significant number of small businesses above the arbitrary $1 million threshold that was previously established by the Clinton Administration in April 200, and which small firms often cite as a major source of confusion and a barrier to growth.
"This change amounts to a home run for small business." Bond said. "In the real world, this will free the independent home builder or repairman from having to account for every nail, board, can of paint or shingle used over the course of a
year. And it will significantly simplify the lives of other service providers, like dentists and veterinarians, who must use some merchandise as part of the service they provide. In the current economic climate, this change will have a
far-reaching, beneficial impact and could not come at a better time." Because the new rules will be published as an IRS Revenue Procedure, Bond also called on the Treasury Department to ensure the long-term availability of the new
cash-accounting rule by taking the additional step of issuing the guidance as a formal regulation in the near future. CONTACT INFORMATION For detailed information regarding this revenue procedure, contact
Cheryl Lynn Oseekey of the Office of Associate Chief Counsel (Income Tax Accounting at (202) 622-4970 (not a toll-free call).
Addendum |
The following businesses cannot use the cash method under this revenue procedure (all
references are to the North American Industrial Classification System (NAICS): Mining in codes 211 and 212; manufacturing in codes 31-33; wholesale trade in code 42, retail in codes 44 and 45; and information industries within codes 5111-5122.
In the case of manufacturing, there is an "exception to the exception," meaning the business will be eligible. If the principal activity is the fabrication or modification of tangible personal property upon demand in accordance with customer design or specifications, the business is eligible. But if the customer merely chooses among pre-selected options (e.g. size, color, or materials) offered by the taxpayer or if the taxpayer must make only minor modifications to its basic design to meet the customer's specification, the business is not eligible.
The procedure addresses entities between $1 million and $10 million because the IRS had issued a previous procedure for businesses with $1 million or less. A few small businesses that are not covered by this new Procedure might still get in under the $1 million procedure since that one had no business activity exceptions.
This new revenue procedure is not applicable to farming since most farms are exempt from cash accounting under Internal Revenue Code (IRC) Sections 446, 447 and 448.
It also cannot be used by those businesses that are required to be on accrual accounting because of IRC section 448. Section 448 prohibits the use of the cash method by a C Corporation with more than $5 million in annual gross receipts. So an important determining factor is whether the business is an S Corporation (or sole proprietorship or partnership) or a C Corporation as well its size.
It is important to note the determination of eligibility will be made on a NAICS code or the entire business. Just one code! This is great news. Determining what NAICS code applies to a business will be based on its principal business activity (i.e., the activity from which the taxpayer derives the largest percentage of its gross receipts.) The significance of this is that in the past, taxpayers got tied up with the IRS in discussions about the application of different tax accounting methods or different lines of business activity within a business. This means a business that derives 60 percent of income from installation and 40 percent from retail sales will be considered eligible! The NAICS can be found at
www.census.gov.
 |
 |
 |
 |
 |
 |
 |
©2001 The Ohio SBDC at Youngstown State University
The Ohio SBDC at Youngstown State University
One University Plaza • Youngstown, OH 44555
Office: 330.746.3350 • Fax:330.746.3324
Additional
Business Articles
