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IRS Announces Guidance on Small Business Accounting Methods, Updates Mileage Rates

  • Internal Revenue Service updates its guidance on accounting methods available to small businesses
  • Guidance aims to simplify the accounting process for smaller firms
  • IRS also announces update to its standard mileage rates

Summary by Dirk Langeveld

The Internal Revenue Service has issued guidance on updated accounting methods available to small businesses, and has also updated its mileage rate for deductions based on vehicle travel for business purposes.

The guidance allows taxpayers to obtain automatic consent to change accounting methods to comply with regulations that were approved under the Tax Cuts and Jobs Act and issued in early 2021. The changes largely exempt small businesses from more complex accounting practices.

Small businesses are defined as those with average annual gross receipts of $25 million or less. However, this cap is being increased to $26 million for 2021 to account for inflation.

The final regulations go into effect for tax years beginning on or after Jan. 5, 2021. The simplified accounting practices, effective for tax years after Dec. 31, 2017, apply to capitalization and inclusion in the inventory costs of certain expenses, the cash method of accounting, long-term contracts, and inventories.

Modifications include guidance on automatic consent procedures under Section 446, procedures for taxpayers to revoke an election made under the proposed regulations, automatic changes for taxpayers that no longer qualify as a small business, a modified procedure for for reseller-producers, and automatic changes to an accrual method for purchases and sales of inventories and using the cash method for determining other income and expenses.

The full IRS guidance on the updated accounting methods is available here.

The IRS has also updated its optional standard mileage rates, which can be used to calculate the deductible costs of using a vehicle for business purposes. In 2022, the rate is 58.5 cents per mile, up 2.5 cents from 2021.

The standard mileage rate is based on an annual study of fixed and variable costs involved in operating a vehicle, such as gas prices and maintenance, and can also be used to reimburse employees for work-related travel. The IRS cautions that taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses due to changes made in the Tax Cuts and Jobs Act.

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