Cash Method of Accounting Allowed for Qualifying Taxpayers
An accounting method is a set of rules for determining how and
when to report income and expenses. The most commonly used methods
are the cash method and an accrual method. Generally, if you
produce, purchase, or sell merchandise in your business, you must
keep an inventory and use the accrual method for purchases and
sales of merchandise.
For tax years ending on or after December 17, 1999, the IRS has
simplified the bookkeeping requirements for qualifying taxpayers.
If you are a qualifying taxpayer, you can now choose, even if you
produce, purchase, or sell merchandise in your business, to:
- Use the cash method of accounting, and
- Not keep an inventory.
Qualifying taxpayers. You are a qualifying taxpayer only
if you meet the gross receipts test for each tax year ending after
December 16, 1998. To qualify, your average gross receipts for the
3-tax-year period ending with each test year must be $1 million or
less. For example, you must test 1998 and 1999 to see if you
qualify to use the cash method and not keep an inventory for 2000.
You qualify if your average gross receipts for 1996, 1997, and
1998 are $1 million or less (1998 test) and your average gross
receipts for 1997, 1998, and 1999 are $1 million or less (1999
test). A tax shelter cannot be a qualifying taxpayer.
If you did not own your business for all of the 3-tax-year
period, include the period of any predecessor. If your business
has not been in existence for 3 tax years, base your average on
the period it has existed.
Not keeping an inventory. If you choose to not keep an
inventory, you will deduct the cost of the items you would
otherwise include in inventory in the year you sell the item, or
the year you pay for them, whichever is later. You deduct the cost
of merchandise purchased for resale that you sold during the year.
If you are a producer, you may use any reasonable method to
estimate the raw material in your work in process and finished
goods on hand at the end of the year to determine the raw material
used to produce finished goods that were sold during the year.
Changing methods. If you qualify and want to change to
the cash method, you must file Form 3115, Application for
Change in Accounting Method. You must follow the provisions in
Revenue Procedure 99-49 in Cumulative Bulletin 1999-2 for an
automatic change in accounting method. Those provisions also apply
if you no longer want to keep inventories. You may file one Form
3115 for both changes.
More information. For more information, see Revenue
Procedure 2001-10 in Internal Revenue Bulletin 2001-2. For more
information on accounting methods, see Publication
538, Accounting Periods and Methods.
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