SECTION 4. SMALL TAXPAYER

EXCEPTION

.01 Pursuant to the discretion under §§ 446(b) and 471, and to simplify bookkeeping requirements for small taxpayers, the Commissioner, as a matter of administrative convenience, will except qualifying taxpayers from the requirements to use an accrual method under § 446 and to account for inventories under § 471. For purposes of this revenue procedure, notwithstanding § 1001 and the regulations thereunder, qualifying taxpayers that use the cash method include amounts in income attributable to open accounts receivable ( i.e., receivables due in 120 days or less) as amounts are actually or con

structively received. However, § 1001 may be applicable to other transactions. Qualifying taxpayers that do not want to account for inventories must treat inventoriable items ( i.e., merchandise purchased for resale and raw materials purchased for use in producing finished goods) in the same manner as materials and supplies that are not incidental under § 1.162–3. Section 263A does not apply to inventoriable items that are treated as materials and supplies that are not incidental.

.02 Under § 1.162–3, materials and supplies that are not incidental are deductible only in the year in which they are actually consumed and used in the taxpayer’s business. For purposes of this revenue procedure, inventoriable items that are treated as materials and supplies that are not incidental are consumed and used in the year in which the taxpayer sells the merchandise or finished goods. Thus, under the cash method, the cost of such inventoriable items are deductible only in that year, or in the year in which the taxpayer actually pays for the inventoriable items, whichever is later. Producers may use any reasonable method of estimating the amount of raw materials in their year-end work-in-process and finished goods inventory to determine the amount of raw materials that were used to produce finished goods that are sold during the tax year, provided that method is used consistently.

.03 The Service and Treasury expect to provide further guidance on when items may be treated as incidental materials and supplies (the cost of which may be deducted currently under § 1.162–3) and when items are inventoriable items (the cost of which, under this revenue procedure, may be deducted no earlier than the year in which the items are consumed and used).