This article appeared in the May 2018 issue of MiMfg Magazine. Read the full issue and find past issues online.

The Tax Cuts and Jobs Act (“the Act”) was the largest tax bill signed into law in over 30 years. Tax experts throughout the country are analyzing the ramifications to determine who the “winners” and “losers” are going forward. An area of importance to Michigan and our economy is the impact on manufacturers by the Act and many of these changes are favorable. In fact, some of the most favorable changes are available for smaller manufacturers. Beginning with the 2018 tax year, accounting method changes are available to businesses with average annual gross receipts (for the three prior tax years) of $25 million or less.

Here are three areas to focus on within the available accounting method changes:

Cash Basis Method of Accounting

First, the Act will now allow more businesses, including manufacturers, to utilize the cash method of accounting provided their average annual gross receipts are $25 million or less. This huge threshold increase will allow many more companies to have the cash basis method available to them. Previously, C corporations with average annual gross receipts over $5 million were excluded from using the cash basis method of accounting. Partnerships with C corporation partners were also subject to the $5 million threshold under the old law. On the other hand, under the Act, the old control group rules will continue to apply when testing for average annual gross receipts for certain related entities.

This accounting method change will allow the taxpayer to currently deduct the excess of its accrued revenue over accrued expenses and payables. Businesses that wish to take advantage of the higher threshold and change their method of accounting from accrual to cash may need to file a Form 3115, Change in Accounting Method.

Inventory Accounting

Second, businesses with inventories that have average annual gross receipts that are $25 million or less may use the cash method of accounting and account for certain inventory items as non-incidental materials and supplies.

Taxpayers that change their method of accounting to benefit from this change may need to file Form 3115, Change in Accounting Method.

Uniform Capitalization (UNICAP) Accounting

Third, the Act will now allow businesses with inventory who meet the threshold to no longer be subject to the onerous UNICAP rules (Internal Revenue Code Section 263A). Before the Act, the threshold was $10 million in average annual gross receipts.

Taxpayers previously subject to UNICAP that elect out of this method, may enjoy a tax deduction created by the reversal of the prior year adjustment. Businesses that wish to take advantage of this opportunity may need to file a Form 3115, Change in Accounting Method.

More companies now allowed to take advantage of cash basis accounting, inventory as non-incidental materials/supplies and UNICAP options. These are three areas that the Tax Cuts and Jobs Act may benefit your manufacturing business.

If you desire assistance in determining whether your business will benefit from a Change in Accounting Method, contact Gordon Advisors or your CPA.

Gordon Advisors, PC is an MMA Premium Associate Member and has been a member company since 2001. Visit online: www.gordoncpa.com.

About the Author

Mary Wade is a senior manager at Gordon Advisors, PC. She may be reached at 248-952-0221 or Mary.Wade@GordonCPA.com.