IRS Shock Wave About to Hit Small Businesses

In a surprise move, the IRS, without seeking input from small business owners and other interested groups, is preparing to release a new set of guidelines that will require many businesses with revenue over $1 million to use the accrual method of accounting. These guidelines are due to be released next week.

Current law requires that businesses with revenue over $5 million must use the accrual method of accounting. Most businesses with revenue that is beneath this threshold may opt to use the accrual method, or may use the cash method of accounting. Using the cash method, revenue is reported when it is actually received and expenses are reported when they are paid. If the accrual method is used, revenues are reported when earned, even if the money is not received. There are other differences between the two methods, including the reporting of accounts receivable and accounts payable.

Many small business owners do their own bookkeeping without the help of a professional. This change in rules may, at the very least, require small businesses to hire someone who can help them set up a new system and learn how to keep the books on an accrual basis.