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Part III. Administrative, Procedural, and Miscellaneous
26 CFR 601.204: Changes in accounting periods and in methods of accounting.
(Also Part 1, secs162, 263A, 446, 471, 481; 1.162 3, 1.263A-1. 1.446-1, 1.471-1, 1.481-1,1.481-4.)
Rev. Proc. 2000-22
SECTION 1. PURPOSE
This revenue procedure provides that the Commissioner of Internal Revenue will exercise his discretion to except a qualifying taxpayer with average annual gross receipts of $1,000,000 or less from the requirements to account for inventories and to use an accrual method of accounting for purchases and sales of merchandise. This revenue procedure also provides the procedures by which a qualifying taxpayer may obtain automatic consent to change to the cash receipts and disbursements method of accounting (the cash method).
SECTION 2. BACKGROUND
.01 Section 446(c) of the Internal Revenue Code generally allows a taxpayer to select the method of accounting it will use to compute its taxable income. A taxpayer is entitled to adopt any one of the permissible methods for each separate trade or business, subject to certain restrictions. For example, sec 446(b) provides that the selected method must clearly reflect income. In addition, sec 1.446-1(c)(2)(i) of the Income Tax Regulations requires that a taxpayer use an accrual method of accounting with regard to purchases and sales of merchandise whenever sec 471 requires the taxpayer to account for inventories, unless otherwise authorized by the Commissioner under sec 1.446-1(c)(2)(ii). Under sec 1.446-- 1(c)(2)(ii), the Commissioner has the authority to permit a taxpayer to use a method of accounting that clearly reflects income even though the method is not specifically authorized by the regulations.
.02 Section 471 provides that whenever, in the opinion of the Secretary, the use of inventories is necessary to clearly determine the income of the taxpayer, inventories must be taken by the taxpayer. Section 1.471-1 requires a taxpayer to account for inventories when the production, purchase, or sale of merchandise is an income-producing factor in the taxpayer's business.
.03 Section 1.162-3 requires taxpayers carrying materials and supplies (other than incidental materials and supplies) on hand to deduct the cost of materials and supplies only in the amount that they are actually consumed and used in operations during the tax year.
.04 Section 263A generally requires direct costs and an allocable portion of indirect...