Baldwin Haspel Burke & Mayer LLC

BHBM Tax Law Alert 8/15/2018


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IRS Issues Guidance on Small Business Accounting Method Changes Under Tax Cuts and Jobs Act

The IRS recently provided guidance with respect to the procedures by which a small business taxpayer may obtain automatic consent to change its method of accounting to a new method established under the Tax Cuts and Jobs Act (the “2017 Tax Act”), which increased the availability of the cash method of accounting and eased qualification for the small business exception to certain accounting rules.

Prior to enactment of the 2017 Tax Act, small business taxpayers were generally required to use the accrual method of accounting once their annual gross earnings reached $5 million. However, the 2017 Tax Act increased the annual earnings threshold for small businesses to $25 million in the prior three-year period.

The IRS provided that eligible small business taxpayers may use the automatic consent procedures for the accounting method changes provided below:

  • switching from the overall accrual method to the overall cash method of accounting;
  • opting out of UNICAP for certain costs, including self-constructed assets;
  • accounting for inventory as non-incidental materials, or using the method used for applicable financial statements;
  • replacing the percentage-of-completion method for long-term construction contracts; and
  • ceasing UNICAP for home construction contracts.

For a full copy of Revenue Procedure 2018-40, please click here.

IRS Finalizes Central Partnership Audit Partnership Representative and Early Adoption Regulations 

The IRS recently issued final regulations on the centralized partnership audit regime, which was enacted into law by the Bipartisan Budget Act of 2015 (“BBA“). The regulations finalize rules regarding:

(1) The designation and authority of the partnership representative; and

(2) The election to apply the centralized partnership audit regime to partnership tax years beginning after Nov. 2, 2015 and before Jan. 1, 2018.

By way of background, the new centralized partnership audit regime enacted as part of the BBA added a new subchapter C to chapter 63 of the Code.

Generally, under I.R.C. § 6221, any adjustment to items of income, gain, loss, deduction, or credit of a partnership for a partnership tax year (and any partner’s distributive share thereof) will be determined, and any tax attributable thereto will be assessed and collected, at the partnership level. Further, the applicability of any penalty which relates to an adjustment to any such item or share will also be determined at the partnership level.

Under the new rules, I.R.C. § 6225(a)(1) provides that any adjustment to items of income, gain, loss, deduction, or credit of a partnership for a partnership tax year, and any partner’s distributive share thereof, are determined at the partnership level. In the event of any adjustment by the IRS in the amount of any item of income, gain, loss, deduction, or credit of a partnership, or any partner’s distributive share, that results in an imputed underpayment, the partnership is required to pay the imputed underpayment in the adjustment year. However, under I.R.C. § 6226, a partnership may make a push out election where its partners for the year under audit (the reviewed year partners) take the adjustments into account.

The regulations are effective on Aug. 8, 2018. They generally affect partnerships for tax years beginning after Dec. 31, 2017.



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