Cash method now available to small businesses with inventory.

• Jurisdiction: United States
• Date: 01 October 2000
• Author: Moore, Philip E.

With the release of Rev. Proc. 2000-22, small businesses that would normally be required to use the accrual method of accounting for tax purposes for the purchase and sale of merchandise may now be able to use the cash method.

Generally, a taxpayer may adopt any permissible method of accounting, subject to certain restrictions, such as when a business has inventory. Regs. Sec. 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. Once inventory has been determined to be an income-producing factor, Regs. Sec. 1.446-1 requires the taxpayer to account for the inventory by using the accrual method for purchases and sales of merchandise. In addition, once it has been established that inventory exists, the taxpayer may be required to include an allocable portion of indirect costs in its inventory under Sec. 263A.

In its effort to simplify bookkeeping requirements for small businesses, the IRS will allow the cash method of accounting for certain small taxpayers. This does not mean the...