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REV. PROC. 2002-12
Code Secs. 162, 63(a), 446,
481
26 CFR 601.204: Changes in
accounting periods and methods of accounting.
(Also Part I, sections 162, 263(a), 446, 481; 1.162-3,
1.263(a)-1, 1.446-1, 1.481-1.)
SECTION 1. PURPOSE
This revenue procedure
provides taxpayers engaged in the trade or business of operating a
restaurant or tavern (as defined in section 4.01 of this revenue
procedure) with a safe harbor method of accounting for the cost of
"smallwares" (as defined in section 4.02 of this revenue
procedure) ("smallwares method"). This revenue procedure
also provides a procedure for such taxpayers to obtain automatic
consent of the Commissioner to change to the smallwares method.
SECTION 2. BACKGROUND
.01 The trade or business of
operating a restaurant or tavern requires the use of many items in
the preparation, service, and storage of food and beverages. Pots
and pans, dishes, and glassware are common examples of these
items, known as "smallwares" in the restaurant industry.
Generally, an "opening package" of smallwares is
purchased before a restaurant or tavern opens its doors to
customers. Although an opening package is made up of hundreds or
thousands of items, it is typically purchased as one unit from the
same vendor. Replacement items are thereafter purchased on an
ongoing basis. Industry data shows that the average cost of an
opening package of smallwares ranges from $10,000 to $50,000, and
that smallwares have an average useful life of slightly over one
year.
.02 Section 162(a) of the Internal Revenue Code allows a
deduction for ordinary and necessary expenses paid or incurred
during the taxable year in carrying on a trade or business. Under
section 1.162-3 of the Income Tax Regulations, the cost of
materials and supplies (other than incidental materials and
supplies) may be deducted only to the extent that the materials
and supplies are actually consumed and used in the taxpayer's
business during the taxable year.
.03 Section 263(a) provides that no deduction is allowed
for the cost of new buildings or of permanent improvements or
betterments made to increase the value of any property or estate.
Section 1.263(a)-2(a) provides examples of capital expenditures,
such as the cost of acquisition, construction, or erection of
buildings, machinery and equipment, furniture and fixtures, and
similar property having a useful life substantially beyond the
taxable year.
.04 Except as otherwise provided, under sections 446(e) and
1.446-1(e), a taxpayer must secure the consent of the Commissioner
before changing a method of accounting for federal income tax
purposes. Section 1.446-1(e)(ii) authorizes the Commissioner to
prescribe administrative procedures setting forth the limitations,
terms, and conditions deemed necessary to permit a taxpayer to
obtain consent to change a method of accounting. Section 481(a)
generally requires those adjustments necessary to prevent amounts
from being duplicated or omitted to be taken into account when a
taxpayer's taxable income is computed under a method of accounting
different from the method used to compute taxable income for the
preceding taxable year.
.05 To resolve disputes concerning whether the cost of
smallwares should be accounted for as currently deductible
expenses under section 162 or capital expenditures within the
meaning of section 263(a), and to simplify the record keeping
requirements with respect to smallwares, the Internal Revenue
Service will permit a taxpayer engaged in the trade or business of
operating a restaurant or tavern that complies with the
requirements of this revenue procedure to account for the cost of
smallwares using the smallwares method provided in section 5 of
this revenue procedure.
SECTION 3. SCOPE
This revenue procedure applies to the cost of smallwares
incurred by taxpayers engaged in the trade or business of
operating a restaurant or tavern. It does not apply to the cost of
smallwares that are start-up expenditures as defined in section
195. Thus, a taxpayer that is not already engaged in the trade or
business of operating a restaurant that opens a new restaurant may
not use the smallwares method provided in section 5 of this
revenue procedure to account for the cost of smallwares paid or
incurred before the new restaurant opens.
SECTION 4. DEFINITIONS
.01 TRADE OR BUSINESS OF OPERATING A RESTAURANT OR TAVERN.
For purposes of this revenue procedure, a taxpayer is engaged in
the trade or business of operating a restaurant or tavern if the
taxpayer's business consists of preparing food and beverages to
customer order for immediate on-premises or off-premises
consumption. These businesses include, for example, full-service
restaurants; limited-service eating places; cafeterias; special
food services, such as food service contractors, caterers, and
mobile food services; and, bars, taverns, and other drinking
places. For purposes of this revenue procedure, the trade or
business of operating a restaurant or tavern also may include food
or beverage services at grocery stores, hotels and motels,
amusement parks, theaters, casinos, country clubs, and similar
social or recreational facilities.
.02 SMALLWARES. For purposes of this revenue procedure,
smallwares consist of the following ten categories of items:
(1) Glassware and paper or
plastic cups;
(2) Flatware (silverware) and
plastic utensils;
(3) Dinnerware (dishes) and
paper or plastic plates;
(4) Pots and Pans;
(5) Table Top Items;
(6) Bar Supplies;
(7) Food Preparation Utensils
and Tools;
(8) Storage Supplies;
(9) Service Items; and
(10) Small Appliances that
cost $500 or less.
Categories 5 through 10
include, but are not limited to, the items listed below:
(5) TABLE TOP ITEMS include items placed on customer
tables, such as salt and pepper shakers, cheese shakers, ash
trays, teapots, cruets, sugar caddies, tablecloths, napkins, menu
holders, menus, vases, candles, and candleholders.
(6) BAR SUPPLIES include mixing glasses, bar strainers,
cutting boards, liquor pourers, jiggers, corkscrews, bottle
openers, storage bottles, wine and champagne stoppers, bar
caddies, wine coolers, decanters, salt and sugar glass rimmers,
slow pourers, and malt shakers.
(7) FOOD PREPARATION UTENSILS AND TOOLS include hand
utensils (spoons, spatulas, wisks, peelers, etc.), pastry and
grill brushes, skimmers, knives, kitchen shears, cutting boards,
strainers, colanders, shakers, dippers, measuring cups and spoons,
thermometers, gloves, goggles, timers, scales, shaker baskets,
salad spinners, lettuce crispers, sifters, pastry bags and tubes,
mixing bowls, pot holders, kitchen towels, cheesecloths, and
kitchen staff uniforms.
(8) STORAGE SUPPLIES include food containers, flatware
sorters, dish containers, and spice racks.
(9) SERVICE ITEMS include pepper mills, cheese graters,
bread boards, pitchers, squeeze dispensers, coffee pots, napkin
receptacles, flatware, plate, glass, and mug storage racks, wait
staff and self-serve trays, soup and salad bar trays and
containers, bus tubs, tray carts, booster seats, and wait staff
uniforms.
(10) SMALL APPLIANCES include iced tea dispensers, can
openers, condiment pumps, individual food warmers, heat lamps,
slicers, glass washers, electric knife sharpeners, blenders,
juicers, and nonindustrial mixers. Small appliances do not include
appliances that cost in excess of $500.
For
purposes of this revenue procedure, smallwares do not include
office supplies, general purpose cleaning supplies, or general
purpose maintenance tools. In addition, smallwares do not include
extraordinary items, such as collectibles or other items of
significant artistic or intrinsic value, items that are accounted
for separately for tax or financial purposes, or items that
generally are listed as scheduled property for insurance purposes.
Examples of extraordinary items are flatware or dinnerware made of
precious metals, and antique vases used for centerpiece or display
purposes.
SECTION 5. SMALLWARES METHOD
.01 Taxpayers within the scope of this revenue procedure
are permitted to account for smallwares in the same manner as
materials and supplies that are not incidental under section
1.162-3.
.02 Under section 1.162-3, the costs of materials and
supplies that are not incidental are deductible in the year in
which the materials and supplies are actually consumed and used in
a taxpayer's business.
.03 For purposes of this revenue procedure, smallwares are
consumed and used in a taxpayer's business, within the meaning of
section 1.162-3, in the taxable year in which they are received at
the restaurant and are available for use. For purposes of this
revenue procedure, "received at the restaurant and available
for use" does not include smallwares purchased and stored at
a warehouse or facility other than the restaurant where the
smallwares will be used.
SECTION 6. CHANGE IN METHOD OF ACCOUNTING
.01 LIMITATIONS, TERMS, AND CONDITIONS. A change in a
taxpayer's treatment of the cost of smallwares to the smallwares
method provided in section 5 of this revenue procedure is a change
in method of accounting to which sections 446 and 481 apply. A
taxpayer that wants to change its method of accounting for the
cost of smallwares to the smallwares method provided in section 5
of this revenue procedure must follow the automatic change in
method of accounting provisions of Rev. Proc. 2002-9 (2002-3 I.R.B.
327) (or its successor) with the following modification: the scope
limitations in section 4.02 of Rev. Proc. 2002-9 do not apply.
However, if a taxpayer is under examination, before an area
appeals office, or before a federal court with respect to any
income tax issue at the time that a copy of the Form 3115,
Application for Change in Accounting Method, is filed with the
national office, the taxpayer must provide a copy of the Form 3115
to the examining agent, appeals officer, or counsel for the
government, as appropriate, at the same time the copy of the Form
3115 is filed with the national office. The Form 3115 must contain
the name(s) and telephone number(s) of the examining agent,
appeals officer, or counsel for the government, as appropriate.
.02 AUDIT PROTECTION. If a taxpayer complies with the
requirements of this revenue procedure and changes its method of
accounting for the cost of smallwares to the smallwares method
provided in section 5 of this revenue procedure, the treatment of
those costs will not be raised as an issue in any taxable year
before the year of change and, if the treatment of the cost of
smallwares has already been raised as an issue in a taxable year
before the year of change, that issue will not be further pursued.
.03 SECTION 481(a) ADJUSTMENT. A taxpayer changing its
method of accounting under this revenue procedure for the cost of
smallwares must take the entire net amount of any section 481(a)
adjustment into account in computing taxable income for the year
of change.
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective for taxable years
ending on or after
December 31, 2001
.
DRAFTING INFORMATION
The principal author of this revenue procedure is Angella
L. Warren of the
Office
of Associate Chief Counsel (Income Tax and Accounting). For
further information regarding this revenue procedure, contact Ms.
Warren at (202) 622-4950 (not a toll-free call).
<<END RULING>>
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