Publication 538 - Accounting Periods And Methods (Page 14 of 23) in pdf

Qualifying small business taxpayer. You are a qualify-

e. NAICS codes 5111 and 5122 (information indus-

ing small business taxpayer under Revenue Procedure

tries).

2002-28 only if:

2. Your principal business activity is the provision of

You satisfy the gross receipts test for each prior tax

services, including the provision of property incident

year ending on or after December 31, 2000 (see

to those services.

Gross receipts test for qualifying small business tax

3. Your principal business activity is the fabrication or

payers, next). Your average annual gross receipts for

modification of tangible personal property upon de-

each test year (explained in Step 1, listed next) must

mand in accordance with customer design or specifi-

be $10 million or less.

cations.

You are not prohibited from using the cash method

Information about the NAICS codes can be found at

under section 448 of the Internal Revenue Code.

or in the instructions for your fed-

Your principle business activity is an eligible business.

eral income tax return.

See Eligible business, later.

Gross receipts. In general, gross receipts must include

You have not changed (or have not been required to

all receipts from all your trades or businesses that must be

change) from the cash method because you became

recognized under the method of accounting you used for

ineligible to use the cash method under Revenue Pro-

that tax year for federal income tax purposes. See the def-

cedure 2002-28.

inition of gross receipts in Temporary Regulations section

1.448-1T(f)(2)(iv) for details.

Note. Revenue Procedure 2002-28 does not apply to

a farming business of a qualifying small business tax-

Business not owned or not in existence for 3 years.

payer. A taxpayer engaged in the trade or business of

If you did not own your business for all of the 3-tax-year

farming generally is allowed to use the cash method for

period used in determining your average annual gross re-

any farming business. See Special rules for farming busi

ceipts, include the period of any predecessor. If your busi-

nesses under Cash Method, earlier.

ness has not been in existence for the 3-tax-year period,

Gross receipts test for qualifying small business

base your average on the period it has existed including

taxpayers. To determine if you meet the gross receipts

any short tax years, annualizing the short tax year's gross

test for qualifying small business taxpayers, use the fol-

receipts.

lowing steps:

Materials and supplies that are not incidental. If you

1. Step 1. List each of the test years. For qualifying

account for inventoriable items as materials and supplies

small business taxpayers under Revenue Procedure

that are not incidental, you will deduct the cost of the

2002-28, the test years are each prior tax year ending

items you would otherwise include in inventory in the year

on or after December 31, 2000.

you sell the items, or the year you pay for them, whichever

is later. If you are a qualifying taxpayer under Revenue

2. Step 2. Determine your average annual gross re-

Procedure 2001-10 and a producer, you can use any rea-

ceipts for each test year listed in Step 1. Your average

sonable method to estimate the raw material in your work

annual gross receipts for a tax year is determined by

in process and finished goods on hand at the end of the

adding the gross receipts for that tax year and the 2

year to determine the raw material used to produce fin-

preceding tax years and dividing the total by 3.

ished goods that were sold during the year. If you are a

3. Step 3. You meet the gross receipts test for qualifying

qualifying small business taxpayer under Revenue Proce-

small business taxpayers if your average annual

dure 2002-28, you must use the specific identification

gross receipts for each test year listed in Step 1 is $10

method, the first-in first-out (FIFO) method, or an average

million or less.

cost method to determine the amount of your allowable

deduction for non-incidental materials and supplies con-

Eligible business. An eligible business is any busi-

sumed and used in your business. See section 4.02 in

ness for which a qualified small business taxpayer can

Revenue Procedure 2001-10 or section 4.05 in Revenue

use the cash method and choose to not keep an inven-

Procedure 2002-28 for more information. Also, see Exam

tory. You have an eligible business if you meet any of the

ple 15 and Example 17 through Example 20 in section 6 of

following requirements.

Revenue Procedure 2002-28 (or any successor).

1. Your principal business activity is described in a North

American Industry Classification System (NAICS)

Changing accounting methods. If you are a qualifying

code other than any of the following NAICS subsector

taxpayer or qualifying small business taxpayer and want

codes:

to change to the cash method or to account for inventoria-

ble items as non-incidental materials and supplies, you

a. NAICS codes 211 and 212 (mining activities).

must file Form 3115. Both changes can be requested un-

b. NAICS codes 31-33 (manufacturing).

der the automatic change procedures. See Form 3115

and the Instructions for Form 3115.

c. NAICS code 42 (wholesale trade).

d. NAICS codes 44-45 (retail trade).

Page 14

Publication 538 (December 2016)

Publication 538 - Accounting Periods And Methods Page 14

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