SECTION 5. DEFINITIONS

.01 Average annual gross receipts de- fined. A taxpayer has average annual gross receipts of $1,000,000 or less if, for each prior tax year ending on or after December 17, 1998, the taxpayer’s average annual gross receipts for the 3-tax-year period ending with the applicable prior tax year does not exceed $1,000,000.

.02 Gross receipts defined. Gross receipts is defined consistent with § 1.448–1T(f)(2)(iv) of the temporary

2001–2 I.R.B. 273 January 8, 2001

regulations. Thus, gross receipts for a tax year equal all receipts derived from all of the taxpayer’s trades or businesses that must be recognized under the method of accounting actually used by the taxpayer for that tax year for federal income tax purposes. For example, gross receipts include total sales (net of returns and allowances), all amounts received from services, interest, dividends, and rents. However, gross receipts do not include amounts received by the taxpayer with respect to sales tax or other similar state and local taxes if, under the applicable state or local law, the tax is legally imposed on the purchaser of the good or service, and the taxpayer merely collects and remits the tax to the taxing authority.

.03 Aggregation of gross receipts. For purposes of computing gross receipts, all taxpayers treated as a single employer under subsection (a) or (b) of § 52 or subsection (m) or (o) of § 414 (or that would be treated as a single employer under these sections if the taxpayers had employees) will be treated as a single taxpayer. However, when transactions occur between taxpayers that are treated as a single taxpayer by the previous sentence, gross receipts arising from these transactions will not be treated as gross receipts for purposes of the average annual gross receipts limitation. See § 1.448– 1T(f)(2)(ii). .04 Taxpayer not in existence for 3 tax years. If a taxpayer has been in existence for less than the 3-tax-year period referred to in section 5.01 of this revenue procedure, the taxpayer must determine its average annual gross receipts for the number of years (including short tax years) that the taxpayer has been in existence.

.05 Treatment of short tax years. In the case of a short tax year, the taxpayer’s gross receipts must be annualized by multiplying the gross receipts of the short tax year by 12 and then dividing the product by the number of months in the short tax year. See § 1.448–1T(f)(2)(iii).

.06 Treatment of predecessors. Any reference to taxpayer in this section 5 includes a reference to any predecessor of such taxpayer.

.07 Example. Taxpayer A, a calendar year taxpayer, manufactures and sells widgets. For federal income tax purposes, Taxpayer A uses an overall accrual method of accounting. Further, Taxpayer A complies

with the requirements of § 1.471–1 to use inventory accounts and § 263A to capitalize direct and indirect costs.

Taxpayer A has gross receipts (as defined in section 5.02 of this revenue procedure) of $200,000 in 1996, $800,000 in 1997 and $1,100,000 in 1998.

To determine whether it qualifies for the small taxpayer exception set forth in section 4 of this revenue procedure beginning with the 1999 tax year, Taxpayer A computes its average annual gross receipts for each prior tax year ending on or after December 17, 1998, that is, its 1998 tax year. Taxpayer A ’s average annual gross receipts for 1998 is $700,000 ($200,000 (1996) + $800,000 (1997) + $1,100,000 (1998) = $2,100,000/3).

Taxpayer A ’s average annual gross receipts for each prior tax year ending after December 17, 1998, does not exceed $1,000,000. Therefore, Taxpayer A qualifies for the small taxpayer exception for its 1999 tax year. By following the procedures set forth in section 6.02 of this revenue procedure, Taxpayer A may change to the cash method and a method of treating inventoriable items in the same manner as materials and supplies that are not incidental under § 1.162–3 for the tax year ending December 31, 1999.

Taxpayer A must determine its applicability for the small taxpayer exception set forth in section 4 of this revenue procedure each year. Thus, to qualify for the exception for its 2000 tax year, Taxpayer A ’s average annual gross receipts for 1999 ( i.e., the average of A ’s gross receipts for 1999, 1998, and 1997) also must be $1,000,000 or less. If, in any later year, Taxpayer A ceases to qualify for the small taxpayer exception set forth in section 4 of this revenue procedure, it must change to an inventory method and an accrual method with respect to the production and sale of widgets in accordance with section 6.04 of this revenue procedure.