One of the main goals of tax reform is to encourage reinvestment in U.S. domestic production. This is through several relief provisions in the Act, which both simplify tax accounting methods and open up more tax benefits.
While we recently posted an article on tax reform for manufacturing, here we’re looking more closely at reporting requirements.
A change from the accrual method to the cash method (cash receipts and disbursements) can make the reporting requirements easier for many small to midsize manufacturing and distribution businesses.
Traditionally, sole proprietorships and individuals favored the cash method, and under the Act, manufacturers can often see benefits from it, too.
Generally, most manufacturers are using an accrual method at this time, wherein:
On the other hand, those manufacturers who use the cash method:
In a pre-tax reform world, C corporations, partnerships with a C corporation as a partner, and tax-exempt trusts or corporations with unrelated business income were usually not permitted to utilize the cash method.
That generally included manufacturing and distribution businesses as well because they are required to keep inventory records. Why? They’re important for determining the cost of goods sold in a taxable year.
Starting in 2018, more businesses can utilize the cash method. In particular, it includes businesses where average annual gross receipts for the prior three years are less than $25 million.
Also, this applies regardless of whether the production, purchase, or sale of goods is an income-producing factor.
If you’re a small manufacturing business—i.e. your average gross receipts are less than $25 million—you don’t have to account for inventories anymore.
You might be exempt—ask yourself these two questions; are you using the cash method, and does your business treat inventories as non-incidental materials and supplies? If so, there’s a good chance.
The role of 263(a) in our tax code is to address uniform capitalization rules. They require certain costs that are normally expensed to be capitalized as part of the inventory for tax purposes.
They apply to both real or tangible personal property produced by the taxpayer, and real or personal property acquired by the taxpayer for the purpose of resale.
In short, changing to the cash method of accounting and changing the way you account for inventories have the potential to yield sizeable benefits over time, and manufacturers and distributors could start realizing benefits right away. They can also be powerful tax deferral tools over time.
Do you have questions that you’d like to share with someone experienced in comprehensive tax planning? Start a conversation with Redpath’s Teresa Knippel, Manufacturing and Distribution Team Leader.
Teresa Knippel is Director, Client Manager, and Manufacturing Industry Team Leader at Redpath and Company. She has been with the firm since 2015 and is focused on establishing long-term advisory relationships with clients, including comprehensive tax planning for income tax, gift and trust, and wealth transfer for high net worth and/or business owner clientele. Teresa has provided public accounting services since 1991. Teresa can be reach at firstname.lastname@example.org or 651.407.5823.More posts by Teresa Knippel