Small Businesses May Find New IRS Accounting Rules Bring Unwelcome Complexity
New Rules, Combined with Last Year’s Installment Method Repeal,
Expected Future Rulings Will Add Up to Confusion
(RIVERWODS, ILL., June 5, 2000) – Many small businesses are not likely to welcome the Treasury Department’s recently released tax accounting simplification plan, according to CCH INCORPORATED (CCH), a leading provider of business and tax information. And, many may find that rather than simplifying matters, it makes them more complex – particularly when combined with last year’s installment-method repeal by Congress. That change required business sellers to pay taxes on the entire selling price, even if they haven’t actually received the money because the buyer is paying off the purchase in installments.
The new Treasury rules require all businesses with more than $1 million in revenues to use an accrual-method of accounting and maintain inventories of purchases and merchandise sales. Previously, small businesses with up to $5 million in revenues were allowed to use much simpler cash-accounting methods.
Under the accrual accounting rules, a business is deemed to have income when services are performed or goods are sold, even though the business may not collect cash from the customer until some future date. Under cash-accounting methods, income is not realized until cash is actually received from the customer.
"Many small businesses already have voiced concern about last year’s congressional repeal of the installment sales method, because it threatens to devalue the selling price of their businesses and hurt their retirement savings options," said Martin Bush, publisher of CCH’s Business Owner Toolkit™ (www.toolkit.cch.com), an online resource for tax and business issues for small business owners. "This new rule has added to that concern because all but the smallest businesses will have to use the accrual method, which not only impacts owners when they go to sell their businesses, but makes complying with their day-to-day tax obligations far more complex."
Adding Complication: Last Year’s Installment Method Repeal
With last year’s repeal of the installment sales method, sellers of an accrual-basis small business are now required to pay taxes on the entire selling price, even if they haven’t actually received the money because it’s being paid off in installments over a long period of time. Previous to the repeal, sellers only paid taxes on the money received in the year it was received.
By issuing these new accounting rules, the Treasury is offering an exception to the repeal for very small businesses – those with less than $1 million in revenues – allowing them to be considered as cash-method businesses. Essentially, the protection for these very small businesses comes from the fact that when they go to sell their businesses, they won’t be affected by the installment plan repeal. Rather, as cash-method businesses, they’ll only be required to pay taxes on the money they receive in each given year.
However, the new rules aren’t welcome by many and there are questions as to whether they fly in the face of the existing Tax Code, which already assigns a legal threshold to determine which businesses must use which accounting system. Under the current Tax Code, use of cash-method accounting is allowed as long as it clearly reflects income. The only limit is on C corporations with average gross sales above $5 million. The Code allows all other business entities to use the cash method without a dollar limitation, although those businesses that carry an inventory must use the accrual method.
"When you start looking at all these rules together, things become very confusing," said Bush. "The one thing that is clear, however, is that many small businesses aren’t happy about this and now Congress is starting to take action."
In March, the House passed a bill restoring the original language to the installment sales method law. The Senate has yet to schedule a vote on the bill, but the release of the Treasury Department’s new rule will likely spur them to do so.
About CCH SOHO
CCH’s Small Office/Home Office (SOHO) group provides a variety of electronic and print products designed to bring total know-how to small businesses. The unit operates CCH Business Owner’s Toolkit (www.toolkit.cch.com) portal site; publishes a highly regarded book series for small business owners; and offers CompleteTax (www.completetax.com), an online tax preparation and filing service for small businesses and individuals.
CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has served four generations of business professionals and their clients. The company annually produces more than 700 electronic and print products for the tax, legal, securities, human resources, health care and small business markets. CCH is a wholly owned subsidiary of Wolters Kluwer U.S. The CCH web site can be accessed at www.cch.com.
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