Checkpoint Contents 2017 Tax Reform Complete Analysis of the Tax Cuts and Jobs Act Organization of the Complete Analysis Analysis Chapter 1400 TAX ACCOUNTING 1403 Alternatives to inventory accounting are made available to most small businesses meeting a $25 million gross receipts test
¶ 1403. Alternatives to inventory accounting are made available to most small businesses meeting a $25 million gross receipts test Code Sec. 471(c), as amended by 2017 Tax Cuts and Jobs Act §13102(c) Generally effective: Tax years beginning after Dec. 31, 2017 Committee Reports, see ¶5035 If IRS determines that the use of inventories is necessary in order to clearly determine the income of any taxpayer, the taxpayer must use an inventory method. FTC 2d/Fin ¶G-5001 ; USTR ¶4714 . In any case where the use of an inventory method is necessary to clearly reflect income, the taxpayer must use the accrual method of accounting with regard to purchases and sales. FTC 2d/Fin ¶G-2089 et seq.; USTR ¶4464 et seq. Under pre-Tax Cuts and Jobs Act law, there were a number of exceptions under which taxpayers that would otherwise be required to account for inventories under Code Sec. 471 and, thus, would have been required to use the accrual method under Code Sec. 446 , could instead treat merchandise as materials and supplies deductible as expenses in the year they were consumed and used. One exception was provided for taxpayers whose average annual gross receipts didn't exceed $1 million. A second exception was provided for taxpayers in certain industries whose average annual gross receipts didn't exceed $10 million and who weren't otherwise prohibited from using the cash method under Code Sec. 448 . ( FTC 2d/Fin ¶G-5000; FTC 2d/Fin ¶G-5005A et seq.; FTC 2d/Fin ¶G-2050; FTC 2d/Fin ¶G-2089.1; USTR ¶4464.07; USTR ¶4714.15 ) New Law. The Tax Cuts and Jobs Act exempts certain taxpayers from the requirement to keep inventories (Com Rept, see ¶5035) by providing that if a taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under Code Sec. 448(a)(3) ) meets the gross receipts test of Code Sec. 448(c) for any tax year (Code Sec. 471(c)(1) as amended by 2017 Tax Cuts and Jobs Act §13102(c)) , Code Sec. 471(a) doesn't apply to that taxpayer for that tax year. (Code Sec. 471(c)(1)(A)) RIA observation: Code Sec. 448(c) , as amended by the Tax Cuts and Jobs Act, provides
that corporations and partnerships with a corporate partner are permitted to use the cash method only if they have average annual gross receipts of $25 million or less during the preceding three years, see ¶ 1401 . In addition, the taxpayer's method of accounting for inventory for that tax year won't be treated as failing to clearly reflect income if the method- (Code Sec. 471(c)(1)(B)) (1) treats inventory as non-incidental materials and supplies, or (Code Sec. 471(c)(1)(B)(i)) (2) conforms to the taxpayer's method of accounting reflected in an "applicable financial statement" (i.e., an AFS, defined below) of the taxpayer for that tax year or, if the taxpayer doesn't have any AFSs for the tax year, the taxpayer's books and records prepared in accordance with the taxpayer's accounting procedures. (Code Sec. 471(c)(1)(B)(ii)) In other words, taxpayers that meet the $25 million gross receipts test aren't required to account for inventories under Code Sec. 471 , but rather may use a method of accounting for inventories that either (1) treats inventories as non-incidental materials and supplies, or (2) conforms to the taxpayer's financial accounting treatment of inventories. (Com Rept, see ¶5035) For any taxpayer that isn't a corporation or a partnership, the gross receipts test of Code Sec. 448(c) must be applied in the same manner as if each trade or business of that taxpayer was a corporation or partnership. (Code Sec. 471(c)(3)) Applicable financial statement. The term "applicable financial statement" has the meaning of that term in Code Sec. 451(b)(3) , see ¶ 1406 . (Code Sec. 471(c)(2)) Accounting method changes. Any change in method of accounting made under Code Sec. 471(c) will be treated for purposes of Code Sec. 481 as initiated by the taxpayer and made with IRS's consent. (Code Sec. 471(c)(4)) RIA observation: The designation of an accounting method as "initiated by the taxpayer" relates to Code Sec. 481(a)(2) which states what is in substance a transitional rule, of significance to increasingly few taxpayers today, concerning the enactment of the 1954 Code, see FTC 2d/Fin ¶G-2299 ; USTR ¶4814 .
RIA observation: Where legislation designates an accounting method change as made with IRS's consent, IRS can nevertheless require, as part of its administration of accounting method rules, that the taxpayer follow consent procedures to make the change, see FTC 2d/Fin ¶G-2202.2 .
Redesignation. The Tax Cuts and Jobs Act redesignates pre-Tax Cuts and Jobs Act Code Sec. 471(c) as Code Sec. 471(d) . Code Sec. 471 as amended by 2017 Tax Cuts and Jobs Act §13102(c) Effective: Tax years beginning after Dec. 31, 2017. (2017 Tax Cuts and Jobs Act §13102(e)(1))
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