The Tax Cuts and Jobs Act (TCJA) passed in December 2017 set forth many significant changes to the tax code. One noteworthy modification is the impact on IRC Section 448. Previously, small business taxpayers with gross receipts exceeding $10 million did not qualify for the cash method of accounting for federal income tax purposes. The TCJA increased this cap to the $25 million threshold, greatly expanding the number of small businesses eligible to use the much simpler method.
While this is advantageous for small companies, switching from accrual-basis to cash-basis accounting posed a tedious process, which included timely applying for and securing prior consent of Form 3115, Application for Change in Accounting Method by the tax deadline. Small business owners were subject to a user fee for obtaining this prior consent.
Fortunately, the IRS released Rev. Proc. 2018-40 last month, which added to the list of automatic changes outlined in Rev. Proc. 2018-31. It solves these complications and will allow qualified small businesses under TCJA to use the cash method by submitting Form 3115 with their 2018 income tax filings.
Rev. Proc. 2018-40 also provides a transition rule for taxpayers with pending Form 3115 applications under the non-automatic change procedures.