Your business’ tax strategy defines and supports the right accounting methods for your business. Do you want to defer income? Accelerate income? What decisions can you make that are advantageous to you now and in the future?

While you may be satisfied with your current accounting methods, the Tax Cuts and Jobs Act did make some notable adjustments to who qualifies for the cash method and to accounting for inventory, revenue recognition, and long-term contracts.

Many of these changes allow businesses to further defer income and the related tax.

Now is a good time to review these changes, compare them to your overall tax strategy, and decide if you should make a change to one of your current accounting methods.

Types of accounting methods

Your overall accounting method sets the framework for how revenues and expenses are reported for tax return purposes.

Each method can show a range of profits reported in the short-term. The accrual basis and cash basis are the two most common methods.

You can use a hybrid or variation of each, but once you’ve selected a method, you must consistently use it from year to year.

1. Accrual basis of accounting

You recognize revenue or income when its earned, regardless of when a payment happens. You take expenses into account when they’re spent or incurred, even if a payment isn’t made that year.

If you receive a prepayment from a customer, you’re typically expected to include this payment as income, even if the income isn’t earned yet.

Cash transactions don’t hold much weight – if any – under this method.

2. Cash basis of accounting

Unlike the accrual basis, cash is king.

You recognize revenue or income in the year you receive cash payments. And, you take expenses into account when cash payments are made.

Who can use the cash method?

The Act made significant changes to the eligibility requirements for the cash method of accounting. Now, this method is available to more businesses.

Why? Because the gross receipts limitation was increased and some former exclusions were dropped.

Under the Act, any business with average annual gross receipts less than $25 million – previously $5 million – for the previous three years can use the cash method. You can adopt this method regardless of your business’ entity structure or industry.

However, aggregation rules still apply when calculating average annual gross receipts. You must combine the gross receipts of related businesses to determine your eligibility every year.

Remember – the gross receipts threshold is indexed for inflation. This change is effective for tax years beginning after Dec. 31, 2017.

So – are you eligible to elect the cash method now? Does it make sense to change your accounting method? Would a change better align with your tax strategy?

Treatment of inventory

Any business with average annual gross receipts less than $25 million for the previous three years can treat inventories as nonincidental material and supplies.

Or, you can apply an inventory treatment according to the method of accounting used in your financial statement, books, or records, regardless of your entity structure or industry.

Before the Act, this average annual gross receipts limit was $10 million.

If they’re treated as nonincidental materials and supplies, items must – generally – be inventoried and expensed when used or consumed.

Uniform capitalization (UNICAP)

Any businesses with average annual gross receipts less than $25 million for the previous three years are exempt from UNICAP rules, regardless of entity structure or industry.

Previously, the annual gross receipts threshold was $10 million. If your business meets these requirements, you can account for inventories at prime cost. You’re no longer required to capitalize certain costs under Section 263A.

This change could lead to additional deductions on your tax return because you’d be able to expense these costs rather than capitalize them into inventory.

Does this change in inventory accounting bring new tax opportunities to your business?

Revenue recognition

The new tax law also updated how revenue may need to be recognized for tax purposes. Now, you should recognize revenue when the all-events test has been satisfied OR when the revenue is recognized in an applicable financial statement.

An applicable financial statement is an audited financial statement that’s prepared in accordance with applicable financial statements or for a government entity.

What’s the impact of this change? Well, the new revenue recognition standard could result in earlier recognition of revenues. If that happens, you must also recognize that income in the same year for tax purposes.

What’s your next step? Consider whether your method of revenue recognition conforms to the new standard.