The Tax Cuts and Jobs Act — better known simply as tax reform — allows more small business taxpayers to use the cash method of accounting. The new law defines a small business taxpayer as a taxpayer who has average annual gross receipts of $25 million or less for the three prior tax years and is not a tax shelter.
Here’s how tax reform changed the rules for small business taxpayers. The law:
- Expands the number of small business taxpayers eligible to use the cash method of accounting by increasing the average annual gross receipts threshold from $5 million to $25 million, indexed for inflation.
- Allows small business taxpayers with average annual gross receipts of $25 million or less for the three prior tax years to use the cash method of accounting.
- Exempts small business taxpayers from certain accounting rules for inventories, cost capitalization and long-term contracts.
- Allows more small business taxpayers to use the cash method of accounting for tax years beginning after December 31, 2017.
2. After tax reform, many corporations will pay blended tax rate
Tax reform legislation replaced the graduated corporate tax structure with a flat 21 percent corporate tax rate. This new maximum tax rate for corporations is effective for tax years beginning after December 31, 2017.
A corporation with a fiscal year that includes January 1, 2018, will pay federal income tax using what is called a blended tax rate. They will not use the flat 21 percent tax rate for their entire fiscal year. To calculate their blended tax rate, these corporations will:
- First calculate their tax for the entire taxable year using the tax rates that were in effect prior to the Tax Cuts and Jobs Act;
- Then calculate their tax using the new 21 percent rate;
- Proportion each tax amount based on the number of days in the taxable year when the different rates were in effect; and,
- Take the sum of these two amounts, which is the corporation’s federal income tax for the fiscal year.
The blended rate applies to all fiscal year corporations with fiscal years that include January 1, 2018. Fiscal year corporations that have already filed their federal income tax returns that do not reflect the blended rate may want to consider filing an amended return.
This change will affect many tax forms and instructions that corporations use. See the 2017 Fiscal Tax Year Filers Must Use Blended Corporate Tax Rates page on IRS.gov for a complete list.
3. Proposed regulations may affect certain domestic corporations
The IRS issued proposed regulations reducing the amount for potential income inclusions determined under Internal Revenue Code Section 956, for certain domestic corporations that own (or are treated as owning) stock in controlled foreign corporations.
The Tax Cuts and Jobs Act enacted a participation exemption system for the taxation of certain foreign income. The new proposed regulations are intended to make sure application of Section 956 is consistent with the new participation exemption system.
4. Check out new, redesigned tax reform pages on IRS.gov
To help business and indivdiual taxpayers find the latest tax reform news, tips, articles and more by topic, the IRS recently redesigned the Tax Reform Resources page on IRS.gov. See the Small Business Initiatives section for our latest business materials.
The IRS also added a special Paycheck Checkup page to IRS.gov. The page helps taxpayers understand how the major changes from the Tax Cuts and Jobs Act can affect their tax situation. They can use the IRS Withholding Calculator right from this page. The IRS encourages businesses to share this page link with employees and urge them to do a Paycheck Checkup to see if they’re having the right amount of tax withheld for their situation.