Paul L. Caron

Saturday, November 27, 2010

Johnson: Small Business Inventory Expensing

Calvin H. Johnson (Texas) has posted Small Business Inventory Expensing, 129 Tax Notes 591 (Nov. 1, 2010), on SSRN. Here is the abstract:

The President’s Economic Recovery Advisory Board (PERAB) recently recommended allowing small businesses to expense their inventory and exclude their customer receivables from tax. The PERAB proposals are a tax shelter or subsidy that are better than no tax. Investing with deducted or excluded funds is economically equivalent to an exemption of profit from tax, and when the interest deduction is taken into account, the result is a negative tax.

Records to reflect inventory and receivables are easy to maintain and are getting cheaper with the availability of computerized accounting. Every business knows how much its customers owe it, and no business has lost money reflected in valuable inventory it still has on hand. The PERAB proposal is prone to abuse as dentists and lawyers seek shelter. Indeed it would always be open to abuse.

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The IRS has already allowed full cash basis for most small ($10 million sales or less) businesses for several years, by way of two or three Revenue Rulings.

Are both the PERAB and Prof. Johnson ignorant of that ?

Posted by: GaapDino | Nov 29, 2010 7:54:27 AM