Clarification of cash accounting rules for small business

(a)

Cash accounting permitted

(1)

In general

Section 446 of the Internal Revenue Code of 1986 (relating to general rule for methods of accounting) is amended by adding at the end the following new subsection:

(g)

Certain small business taxpayers permitted to use cash accounting method without limitation

(1)

In general

An eligible taxpayer shall not be required to use an accrual method of accounting for any taxable year. (2)

Eligible taxpayer

For purposes of this subsection, a taxpayer is an eligible taxpayer with respect to any taxable year if— (A) for all prior taxable years beginning after December 31, 2004, the taxpayer (or any predecessor) met the gross receipts test of section 448(c), and (B) the taxpayer is not subject to section 447 or 448.

(2)

Expansion of gross receipts test

(A)

In general

Paragraph (3) of section 448(b) of such Code (relating to entities with gross receipts of not more than $5,000,000) is amended by striking $5,000,000 in the text and in the heading and inserting $10,000,000. (B)

Conforming amendments

Section 448(c) of such Code is amended— (i) by striking $5,000,000 each place it appears in the text and in the heading of paragraph (1) and inserting $10,000,000, and (ii) by adding at the end the following new paragraph:

(4)

Inflation adjustment

In the case of any taxable year beginning in a calendar year after 2005, the dollar amount contained in subsection (b)(3) and paragraph (1) of this subsection shall be increased by an amount equal to— (A) such dollar amount, multiplied by (B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting calendar year 2004 for calendar year 1992 in subparagraph (B) thereof.

If any amount as adjusted under this subparagraph is not a multiple of $100,000, such amount shall be rounded to the nearest multiple of $100,000.

(b)

Clarification of inventory rules for small business

(1)

In general

Section 471 of the Internal Revenue Code of 1986 (relating to general rule for inventories) is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection:

(c)

Small business taxpayers not required to use inventories

(1)

In general

A qualified taxpayer shall not be required to use inventories under this section for a taxable year. (2)

Treatment of taxpayers not using inventories

If a qualified taxpayer does not use inventories with respect to any property for any taxable year beginning after December 31, 2004, such property shall be treated as a material or supply which is not incidental. (3)

Qualified taxpayer

For purposes of this subsection, the term qualified taxpayer means— (A) any eligible taxpayer (as defined in section 446(g)(2)), and (B) any taxpayer described in section 448(b)(3).

(2)

Conforming amendments

(A) Subpart D of part II of subchapter E of chapter 1 of such Code is amended by striking section 474. (B) The table of sections for subpart D of part II of subchapter E of chapter 1 of such Code is amended by striking the item relating to section 474. (c)

Effective date and special rules

(1)

In general

The amendments made by this section shall apply to taxable years beginning after December 31, 2004. (2)

Change in method of accounting

In the case of any taxpayer changing the taxpayer’s method of accounting for any taxable year under the amendments made by this section— (A) such change shall be treated as initiated by the taxpayer; (B) such change shall be treated as made with the consent of the Secretary of the Treasury; and (C) the net amount of the adjustments required to be taken into account by the taxpayer under section 481 of the Internal Revenue Code of 1986 shall be taken into account over a period (not greater than 4 taxable years) beginning with such taxable year.