The U.S. Department of Treasury will release a plan outlining priorities for projects related to implementing H.R. 1, commonly referred to as the Tax Cuts and Jobs Act (TCJA).
At a District of Columbia Bar Taxation Community event on January 25, Treasury Tax Legislative Counsel Thomas West announced that the plan will likely be issued in the next few weeks. West touched on some of the areas in which taxpayers can expect to see guidance coming soonest.
Accounting methods are likely to receive attention early. West discussed two items in particular — methods changes for small businesses, and changes to the accrual method under section 451.
Under TCJA, the threshold for qualified small businesses jumps from $5 million in average annual gross receipts to $25 million in 2018. Qualification as a small business affects a number of accounting method issues, including whether a taxpayer may use the overall cash method of accounting, how a taxpayer is required to report inventory and whether a taxpayer must use the Uniform Capitalization (UNICAP) rules of section 263A. Tax professionals anticipate guidance on how taxpayers should proceed in the transition period before this change takes effect, as it is not clear, for example, how small business taxpayers are to implement these changes.
Section 451(b) as enacted by TCJA now prevents accrual basis taxpayers from deferring revenue recognition beyond when it is recognized for book purposes, with certain exceptions including special methods of accounting. Guidance is expected to address exactly what constitutes a ‘special method,’ and whether financial accounting that incorporates estimates and industry standards should accelerate tax reporting that generally ignores estimates in favor of hard numbers. The TJCA also codifies the deferral method of accounting for advance payment provisions under Rev. Proc. 2004-34, but the language as to what items qualify for deferral is not clear, so guidance would be welcomed in this area.
West further identified section 168 as an area of interest, as cost recovery is one of the major areas of change under TCJA. Guidance is expected to address how taxpayers should treat 15-year qualified improvement property placed into service after Dec. 31, 2017, which is currently ambiguous under TCJA. The Joint Explanatory Statement accompanying TCJA references a 15-year recovery period for qualified improvement property placed in service beginning in 2018; however, section 168(e)(3)(E) does not incorporate the change leading to the conclusion that qualified improvement property placed in service beginning in 2018 is 39-year property, not eligible for accelerated first year depreciation.
West noted that sections 199A (the qualified business income deduction) and 163(j) (interest limitations) are likely to be addressed quickly. TCJA made major changes to these sections, and guidance is likely to clarify definitions and give further specificity for how to apply the new rules to various types of entities.
Businesses are encouraged to check with their tax professionals as Treasury releases its priorities and associated guidance. Check RSM’s Tax Reform Resource Center for the latest analysis.