A quirk in the TCJA's small-business exceptions

December 2, 2019

By Christopher W. Hesse, CPA

December 1, 2019

Some small businesses that otherwise qualify might not be permitted to use the cash method of accounting or certain provisions that simplify record keeping because of a quirk introduced by the Tax Cuts and Jobs Act. Find out which businesses might not qualify.


  • The law known as the Tax Cuts and Jobs Act, P.L. 115-97, contains certain provisions that simplify recordkeeping for small businesses. If a business has average annual gross receipts of $25 million or less, it is permitted to use the cash method of accounting and is spared from having to comply with a variety of burdensome requirements.
  • "Tax shelters" are expressly denied the benefit of these simplifying provisions, regardless of whether they satisfy the $25 million gross receipts test.
  • The definition of a tax shelter is broader than many people realize. It encompasses "syndicates," which, in general, means businesses in which more than 35% of the losses are allocable to limited partners or limited entrepreneurs.
  • Through advance planning, some small businesses that are at risk of a syndicate designation may be able to avoid it, thus preserving their ability to use the cash method and rely on the other tax simplifications.
  • From a policy standpoint, the tax shelter disqualification sweeps too broadly. The AICPA urges Treasury and the IRS to provide certain small businesses relief from the syndicate definition to ensure that they will qualify for the TCJA's simplifying provisions. Passive activity rules are effective in stymying abuses, and Congress has essentially said that small businesses should not be saddled with complex accounting method rules.

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