FAQs on Converting to Cash Basis
Switching to the cash basis can provide a significant tax deferral and can be a tool to help your company grow. It does require planning. Although this seems like a “loop hole”, it was the intended to help small manufacturers. If eligible, this is a strategy that most manufacturers should adopt.
Here’s some questions companies should ask themselves as to whether it would be tax-wise to switch to cash basis accounting, says DHJJ – an affiliate TMA member :
Is this a permanent deferral of tax? It’s permanent as long as you are in business and total accounts receivable exceeds accounts payable and accrued expenses. The amount of deferred tax can grow as the business grows.
How do I know if converting to cash basis will save me money? If your total accounts receivable is greater than your accounts payable, converting will save you money.
Do I have to switch in 2018? No, you can switch in any future year under the current law. The biggest tax impact occurs in the year you make the switch.
How is the $25 million dollar gross revenue test calculated? Eligibility is determined annually based on the average gross revenue for the prior three years. To be eligible for 2018, your average revenue for 2015, 2016 and 2017 must be under $25 million.
What happens if we exceed the $25 million average in a future year? A company is required to switch back to the accrual method if average gross revenue exceeds $25 million. The deferred income is added back over a four-year period.
DHJJ specializes in working with manufacturers and has the expertise needed to maximize the benefit of this tax method.