NFIB

Small Businesses Benefit from IRS Rule Change
12/14/2001

On Dec. 10, the IRS issued Notice 2001-76, which expands the number of businesses that are permitted to use the cash accounting method. Specifically, the rule states that qualifying businesses with less than $10 million in annual revenues can use cash accounting for tax purposes.

The IRS says that small businesses may use the new rules for 2001 tax returns and for the years ahead.

The rule change will benefit more than 500,000 small businesses by reducing administrative costs, allowing deduction of supplies when purchased and eliminating taxes on income never received, said NFIB Manager of Congressional Affairs Dan Blankenburg.

"NFIB has been lobbying both the executive and legislative branches of government for expanded cash accounting for many years," Blankenburg said. "The rule change is an important step in NFIB's ongoing efforts to achieve tax simplification and fairness for small business."

NFIB's involvement in the issue is based on an NFIB Member Ballot vote in which 83 percent of members said small business should be able to use the cash accounting method.

Example of Cash Accounting Benefit

HereÆs how the cash method could benefit a contractor:

A contractor buys lumber and installs a deck for a customer, who then refuses to pay the contractor for his services. The accrual method requires the contractor to report the income, even though it was never received; the cash accounting method allows the contractor to deduct the cost of supplies, without ever reporting the income. In this example, the cash method of accounting more accurately reflects the actual business income. The accrual method requires small business owners to pay taxes on services and merchandise, even if they didnÆt receive payment for them.

Who Qualifies?

The new rule will allow qualifying businesses with revenues under $10 million to use the cash method. There are certain types of businesses that may not use the cash method, even if they fall into the revenue range. Those business types are: retail trade, wholesale trade, manufacturing, some information industries (specifically publishers of newspapers and magazines) and mining.

What Small Business Owners Should Do

Small business owners should consult with their tax advisors to see if the new rule will benefit their businesses. Tax filers must fill out an IRS form to change accounting methods.

"NFIB will continue its fight for a simpler tax code so small business owners can spend less time worrying about taxes and more time running their businesses," Blankenburg says.