The Tax Cuts and Jobs Act brought several improvements for small businesses, most notably, favorable accounting methods such as use of the cash method and not having to deal with the Unicap rules. The AICPA Tax Section recently posted a position paper noting 13 more changes that would further help modernize the Code to reflect how small businesses operate. Some of these would more completely simplify what Congress started with the TCJA.
For example, the TCJA increased the Section 179 expensing amount to $1 million, adjusted for inflation annually. But, despite the fact that intangibles are important to all sizes of businesses today (and for the past two decades), it only applies to tangible assets (and off-the-shelf software), not intangible assets, such as acquisition of a patent or domain name.
The TCJA also allows for use of the cash method by businesses with average annual gross receipts in the prior 3-year period of $25 million or less ($26 million starting in 2019). Yet, despite the higher Section 179 amount and the use of the cash method, a small business might still be amortizing such items as acquired intangibles, start-up expenditures and organizational expenditures.
Here is the list of the 13 items from the AICPA Tax Section:
- Expand section 179 to also include intangible assets.
- Further simplify accounting method rules for small businesses (such as allowing completed contract accounting).
- Increase the deduction thresholds under sections 195, 248 and 709 and adjust them for inflation.
- Simplify retirement plan options and rules for self-employed individuals.
- Modernize the definition of tax shelter (the one used in the TCJA is from 1986 before we had the passive activity loss limitation rules and before LLCs were used in all states as a common business vehicle).
- Repeal the individual and estate and trust AMT—the corporate AMT was repealed; this should have also have at least been done with respect to business preferences for all taxpayers.
- Relax the exclusive use requirement for a home office deduction (anyone taking their smartphone into their home office likely has violated the exclusive use requirement).
- Allow a deduction for health insurance of self-employed individuals in computing self-employment tax.
- Increase the current, longstanding $400 self-employment earnings threshold.
- Provide similar treatment for all businesses with respect to deducting state and local income taxes—corporations can deduct all of their taxes, all businesses should be allowed the same treatment. Today, the $10,000 SALT cap also applies to income taxes attributable to an individual’s sole proprietor, partnership or S Corp income.
- Limit section 461(l) and the 80% limitation on NOLs of section 172 for start-up businesses.
- Repeal section 465.
- Require all estimated tax payments to be due on the 15th day after quarter end.
For details, see the complete position paper here.
I think it’s a great list of ideas (truth in writing—I proudly chair the AICPA Tax Executive Committee who assembled this list with help from other tax section volunteers and staff). Blog posts are my own.
What do you think? Annette Nellen.
Author: Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.