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Revenue procedure 2000-22 allows any company that meets a sales test to use the cash method of accounting for tax purposes. This includes sole proprietors, partnerships, S corporations and regular corporations. If a taxpayer meets the sales test, it no longer matters whether it is selling merchandise that is a “material income-producing factor” (discussed below).
To compute the sales test, a company averages revenue from the last three years. If the average is less than the $1 million threshold, the cash method is always allowed (but not required). For purposes of this test gross receipts include most normal items, such as sales revenue, services, interest, dividends, rents, royalties and the like, but not sales tax the taxpayer collects.
Note that Rev. Proc. 2002-28 allows a taxpayer engaged in activities (except certain mining, manufacturing, wholesale trade, retail trade, and information industries) with average annual gross receipts of $10 million or less to use the cash method and to account for inventory as nonincidental materials and supplies—if Sec. 448 does not prohibit the taxpayer from using the overall cash method.
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