![]() As previously discussed, The TCJA amended IRC Section 263A to add a new general exception for small businesses (excluding tax shelters) meeting the gross-receipts test under IRC Section 448(c), which exempts those taxpayers from applying the rules of IRC Section 263A to inventory and self-constructed assets (including interest capitalization). Under the final regulations, the only inventory costs includible in the IRC Section 471(c) NIMS inventory method are (1) direct material costs of property produced and (2) costs of property acquired for resale.Įxemption from IRC Section 263A. Acknowledging that (1) other guidance (Revenue Procedures 2001-28) created uncertainty around whether direct labor and overhead costs must be capitalized under the NIMS method and (2) tracking direct labor costs can be burdensome and difficult for many small businesses, the IRS and Treasury decided to exclude direct labor from the costs included in inventory treated as NIMS. ![]() Some commenters recommended that direct labor costs be excluded from the definition of inventory costs under the IRC Section 471(c) NIMS inventory method. Under the IRC Section 471(c) NIMS inventory method, the final regulations retain that inventory treated as NIMS is used or consumed when provided to the customer (consistent with prior guidance). To reduce confusion over use of the word "inventory" in the proposed regulations and the nature of property treated as NIMS under IRC Section 471(c)(1)(B)(i), the final regulations refer to the method under that provision of the Code as the "section 471(c) NIMS inventory method" (referred to, in this Tax Alert, as the "IRC Section 471(c) inventory method"). A small business can change its method of accounting for inventories under IRC Section 471 using the automatic change provisions to either: (1) treat inventory as non-incidental materials and supplies (NIMS) or (2) conform to the accounting method reflected in the business's applicable financial statement (AFS) for the tax year (AFS IRC Section 471(c) inventory method), or reflected in its books or records if the business does not have an AFS (non-AFS IRC Section 471(c) inventory method). Inventory treated as non-incidental materials and supplies. IRC Section 471 small business taxpayer exemptions are modified The IRS received numerous comments on the proposed regulations, considered but rejected most, and accepted several that resulted in changes in the final regulations. One year later, the IRS issued the current general automatic change procedure addressing automatic cash to accrual method changes (Revenue Procedure 2019-43 see Tax Alert 2019-2059). The TCJA (1) broadened the small-business exception by increasing the gross-receipts-test amount to $25 million or less, indexed for inflation, and (2) applied the same higher gross-receipts-test amount to businesses that want to use the simplified accounting rules under IRC Sections 471, 263A and 460.įollowing enactment of the TCJA, the IRS issued guidance (Revenue Procedure 2018-40 Tax Alert 2018-1662) on how a small business could obtain automatic consent to change its methods of accounting. ![]() ![]() But IRC Section 448(c) allows small businesses to use the cash method of accounting (small-business exception) if their annual average gross receipts fall at or below a certain amount for the three-year period ending immediately before the current tax year (gross-receipts test). IRC Section 448 generally limits use of the cash method of accounting. They also implement changes made under the Tax Cuts and Jobs Act (TCJA) that simplified the accounting rules for eligible small business taxpayers, thereby providing important exceptions from the general cash method of accounting limitation under IRC Section 448, the IRC Section 471 inventory rules, the IRC Section 263A cost capitalization rules and the IRC Section 460(e) limitation on the availability of the completed contract method. The new rules finalize underlying proposed regulations (REG-132766-18 see Tax Alert 2020-2114) with few changes. The IRS has issued final regulations ( TD 9942) updating tax accounting rules for small businesses. IRS issues final regulations simplifying tax accounting rules for small businesses to reflect TCJA favorable changes ![]()
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