IRS Announces Change that Favors Small Businesses

Nearly two years ago, the IRS released guidelines requiring many businesses with revenue over $1 million to use the accrual method of accounting instead of the cash method. This was an abrupt change from a previous ruling that allowed businesses to use the cash method of accounting if revenues were under $5 million.

The IRS has changed its tune once again and now has issued rules stating that many service-related businesses with annual average gross receipts of $10 million or less may use the cash method of accounting.

The change is "a home run for small business," according to Senator Kit Bond, R-MO. "In the real world, this will free the independent home builder or repairman from having to account for every nail, board, can of paint, or shingle used over the course of a year."

It is estimated that approximately 500,000 businesses will be affected by this ruling. "This is another way in which we're making it easier for small business owners to comply with the tax laws, so that they can spend more time being successful in their businesses," said Charles Rossotti, IRS commissioner.

Certain small businesses are excluded from the new rules including manufacturers, wholesalers, retailers, miners, publishers, and sound recorders, unless they are primarily a service business or are involved in custom manufacturing.

The details of this ruling are available in IRS Notice 2001-76. The new rules are effective for the entire 2001 tax year.

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