SECTION 6. EXAMPLES

Assume for purposes of the following examples that the taxpayers are not prohibited from using the cash method under § 448. Also assume for purposes of examples 2 through 10 that the taxpayers have average annual gross receipts of $10,000,000 or less.

Example 1. Taxpayer is a calendar year plumbing contractor that installs plumbing fixtures in customers’ homes and businesses. Taxpayer reasonably determines that its principal business activity is construction, which is described in NAICS code 23. Taxpayer’s gross receipts at the end of the three preceding taxable years are:

Gross receipts

1998: $ 6,000,000

1999: 9,000,000

2000: 12,000,000

Taxpayer’s average annual gross receipts for the 3–taxable year-period ending in the 2000 taxable year is $9,000,000 ($6,000,000 + $9,000,000 + $12,000,000 = $27,000,000/3). Taxpayer may use the cash method for all its trades or businesses pursuant to this revenue procedure for its 2001 taxable year because its average annual gross receipts for each prior taxable year ending on or after December 31, 2000, is $10,000,000 or less and its principal business activity is not described in the ineligible NAICS codes listed in section 4.01(1)(a) - (e).

small business taxpayer may use the cash method as described in this revenue procedure with respect to any separate and distinct trade or business whose principal business activity is not described in an ineligible NAICS code in section 4.01(1)(a) through (e) or is described in either section 4.01(2) or section 4.01(3). No trade or business will be considered separate and distinct unless a complete and separable set of books and records is kept for such trade or business. See § 1.446–1(d)(2).

.02 Notwithstanding § 1001 and the regulations thereunder, qualifying taxpayers that use the cash method for an eligible trade or business under section 4.01 of this revenue procedure include amounts in income attributable to open accounts receivable ( i.e., receivables due in 120 days or less) as amounts are actually or constructively received. However, § 1001 may be applicable to other transactions.

.03 Qualifying small business taxpayers that are permitted to use the cash method for an eligible trade or business under section 4.01 of this revenue procedure and that do not want to account for inventories under section 471 must treat all inventoriable items ( e.g., items purchased for resale to customers and raw materials purchased for use in producing finished goods) in such trade or business in the same manner as materials and supplies that are not incidental under § 1.162–3. Items that would be accounted for as incidental materials and supplies for purposes of § 1.162–3 may still be accounted for in that manner. Whether an item is purchased for resale (and thus must be accounted for as a non-incidental material and supply) or is purchased to provide to customers incident to services (and thus may be accounted for as either an incidental or a non-incidental material and supply depending on the facts and circumstances) must be determined under general tax principles.

.04 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 the qualifying small busi

ness taxpayer sells the items to a customer. Thus, under the cash method as described in this revenue procedure, the cost of such inventoriable items are deductible only in that year, or in the year in which the taxpayer actually pays for the goods, whichever is later. A qualifying small business taxpayer may use any reasonable method to determine the amount of the allowable deduction ( e.g., first in, first out or average cost) provided that the method is used consistently.