Staying Flexible and Trying New Accounting Methods

In July, President Obama introduced a proposal to lower the income tax rate on corporations from 35 percent to 28 percent. While many corporate executives welcome the change, it could mean a change in accounting methods is necessary for many businesses. It's not up to accountants to decide whether or not a business's accounting methods need to change. However, it's important that you remain flexible in case clients decide to make changes and discuss all the possibilities with your clients so that they can make informed decisions.

According to Forbes.com, the current corporate tax rate in the United States is the highest among developed nations. Obama's proposal to lower the corporate tax rate and transition to a simpler tax system is designed to keep the corporate tax rate competitive with other countries and generate new federal revenue that can be used to pay for infrastructure projects that would create new middle-class jobs. While the proposal sounds ideal, it's not without flaws.

The topic of corporate tax reform focuses mostly on C corporations, because these are the only type of businesses that normally pay corporate-level tax. Many small business owners aren't thrilled about being left out and are demanding that changes be made to help level the playing field. Also, while the proposal will lower the top corporate tax rate, it will also eliminate numerous deductions, which could result in corporations actually paying more taxes.

As Congress prepares to overhaul the nation's tax code, business leaders are working closely with their accountants to determine whether or not changes in accounting methods will be needed. Some of the biggest changes the accounting industry could be facing are the elimination of last in, first out (LIFO) inventory accounting, limits on interest deductions, and adjustments in the depreciation schedules. The possibility of eliminating LIFO inventory accounting alone could require businesses to change their accounting methods, but the proposed deduction changes make it imperative that you discuss the effects of each change individually before making changes.

If the business you're working with needs to change its accounting methods, it's important to remember that, with a few exceptions, a business can't change its method of accounting for tax purposes without prior approval from the IRS. You must have prior IRS approval before major changes are made, including:

• Changes in overall accounting methods—from the cash method to the accrual method or vice versa
• Changes in the method used to value inventory
• Changes in the depreciation or amortization accounting methods

The possibility of corporate tax reform is a good reminder that the accounting industry isn't always black and white. Regardless of whether or not the companies you work with decide to change their accounting methods, it's critical for you to maintain up-to-date knowledge of current events so that you can give your clients good financial advice.

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