Subpart A—Methods of Accounting in General
Editorial Notes
Amendments
1986—
1976—
§446. General rule for methods of accounting
(a) General rule
Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books.
(b) Exceptions
If no method of accounting has been regularly used by the taxpayer, or if the method used does not clearly reflect income, the computation of taxable income shall be made under such method as, in the opinion of the Secretary, does clearly reflect income.
(c) Permissible methods
Subject to the provisions of subsections (a) and (b), a taxpayer may compute taxable income under any of the following methods of accounting—
(1) the cash receipts and disbursements method;
(2) an accrual method;
(3) any other method permitted by this chapter; or
(4) any combination of the foregoing methods permitted under regulations prescribed by the Secretary.
(d) Taxpayer engaged in more than one business
A taxpayer engaged in more than one trade or business may, in computing taxable income, use a different method of accounting for each trade or business.
(e) Requirement respecting change of accounting method
Except as otherwise expressly provided in this chapter, a taxpayer who changes the method of accounting on the basis of which he regularly computes his income in keeping his books shall, before computing his taxable income under the new method, secure the consent of the Secretary.
(f) Failure to request change of method of accounting
If the taxpayer does not file with the Secretary a request to change the method of accounting, the absence of the consent of the Secretary to a change in the method of accounting shall not be taken into account—
(1) to prevent the imposition of any penalty, or the addition of any amount to tax, under this title, or
(2) to diminish the amount of such penalty or addition to tax.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1984—Subsec. (f).
1976—Subsecs. (b), (c), (e).
Statutory Notes and Related Subsidiaries
Effective Date of 1984 Amendment
§447. Method of accounting for corporations engaged in farming
(a) General rule
Except as otherwise provided by law, the taxable income from farming of—
(1) a corporation engaged in the trade or business of farming, or
(2) a partnership engaged in the trade or business of farming, if a corporation is a partner in such partnership,
shall be computed on an accrual method of accounting. This section shall not apply to the trade or business of operating a nursery or sod farm or to the raising or harvesting of trees (other than fruit and nut trees).
(b) Preproductive period expenses
For rules requiring capitalization of certain preproductive period expenses, see section 263A.
(c) Exception for certain corporations
For purposes of subsection (a), a corporation shall be treated as not being a corporation for any taxable year if it is—
(1) an S corporation, or
(2) a corporation which meets the gross receipts test of section 448(c) for such taxable year.
(d) Coordination with section 481
Any change in method of accounting made pursuant to this section shall be treated for purposes of section 481 as initiated by the taxpayer and made with the consent of the Secretary.
(e) Certain annual accrual accounting methods
(1) In general
Notwithstanding subsection (a) or section 263A, if—
(A) for its 10 taxable years ending with its first taxable year beginning after December 31, 1975, a corporation or qualified partnership used an annual accrual method of accounting with respect to its trade or business of farming,
(B) such corporation or qualified partnership raises crops which are harvested not less than 12 months after planting, and
(C) such corporation or qualified partnership has used such method of accounting for all taxable years intervening between its first taxable year beginning after December 31, 1975, and the taxable year,
such corporation or qualified partnership may continue to employ such method of accounting for the taxable year with respect to its qualified farming trade or business.
(2) Annual accrual method of accounting defined
For purposes of paragraph (1), the term "annual accrual method of accounting" means a method under which revenues, costs, and expenses are computed on an accrual method of accounting and the preproductive period expenses incurred during the taxable year are charged to harvested crops or deducted in determining the taxable income for such years.
(3) Certain nonrecognition transfers
For purposes of this subsection, if—
(A) a corporation acquired substantially all the assets of a qualified farming trade or business from another corporation in a transaction in which no gain or loss was recognized to the transferor or transferee corporation, or
(B) a qualified partnership acquired substantially all the assets of a qualified farming trade or business from one of its partners in a transaction to which section 721 applies,
the transferee corporation or qualified partnership shall be deemed to have computed its taxable income on an annual accrual method of accounting during the period for which the transferor corporation or partnership computed its taxable income from such trade or business on an annual accrual method.
(4) Qualified partnership defined
For purposes of this subsection—
(A) Qualified partnership
The term "qualified partnership" means a partnership which is engaged in a qualified farming trade or business and each of the partners of which is a corporation other than—
(i) an S corporation, or
(ii) a personal holding company (within the meaning of section 542(a)).
(B) Qualified farming trade or business
(i) In general
The term "qualified farming trade or business" means the trade or business of farming—
(I) sugar cane,
(II) any plant with a preproductive period (as defined in section 263A(e)(3)) of 2 years or less, and
(III) any other plant (other than any citrus or almond tree) if an election by the corporation under this subparagraph is in effect.
In the case of a partnership and for purposes of paragraph (3)(A), subclauses (II) and (III) shall not apply.
(ii) Effect of election
For purposes of paragraphs (1) and (2) of section 263A(e), any election under this subparagraph shall be treated as if it were an election under subsection (d)(3) of section 263A.
(iii) Election
Unless the Secretary otherwise consents, an election under this subparagraph may be made only for the corporation's 1st taxable year which begins after December 31, 1986, and during which the corporation engages in a farming business. Any such election, once made, may be revoked only with the consent of the Secretary.
(Added
Editorial Notes
Amendments
2017—Subsec. (c).
Subsec. (c)(2).
Subsec. (d).
Subsec. (e).
Subsec. (f).
Subsec. (g).
Subsecs. (h), (i).
1997—Subsec. (i)(3).
"(A) the gross receipts of the corporation from the trade or business of farming for the year of the change or any subsequent taxable year, is less than
"(B) such gross receipts for the taxpayer's last taxable year beginning before the year of the change (or for the most recent taxable year for which a reduction in the suspense account was made under this paragraph),
the amount in the suspense account (after taking into account prior reductions) shall be reduced by the percentage by which the amount described in subparagraph (A) is less than the amount described in subparagraph (B)."
Subsec. (i)(4).
Subsec. (i)(5), (6).
1990—Subsec. (g)(1)(A).
Subsec. (g)(4)(B).
1988—Subsec. (b).
Subsec. (g)(1).
1987—Subsec. (c).
"(1) an S corporation,
"(2) a corporation of which at least 50 percent of the total combined voting power of all classes of stock entitled to vote, and at least 50 percent of the total number of shares of all other classes of stock of the corporation, are owned by members of the same family, or
"(3) a corporation the gross receipts of which meet the requirements of subsection (e)."
Subsec. (d).
Subsec. (e).
Subsec. (h)(1).
Subsec. (h)(1)(A), (B).
Subsec. (i).
1986—Subsec. (a).
Subsec. (b).
Subsec. (g)(1).
1982—Subsec. (c)(1).
Subsec. (g)(1).
Subsec. (g)(3).
Subsec. (g)(4).
1978—Subsec. (a).
Subsec. (f)(3).
Subsec. (g)(2).
Subsec. (h).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date of 1997 Amendment
Effective Date of 1990 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1987 Amendment
Effective Date of 1986 Amendment
If any interest costs incurred after Dec. 31, 1986, are attributable to costs incurred before Jan. 1, 1987, the amendment by
Amendment by
Effective Date of 1982 Amendment
Amendment by
Effective Date of 1978 Amendment
Amendment by section 703(d) of
Effective Date
"(A)
"(B)
"(i) members of two families (within the meaning of paragraph (1) of [former] section 447(d) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], as added by paragraph (1)) owned, on October 4, 1976 (directly or through the application of such [former] section 447(d)), at least 65 percent of the total combined voting power of all classes of stock of such corporation entitled to vote, and at least 65 percent of the total number of shares of all other classes of stock of such corporation; or
"(ii) members of three families (within the meaning of paragraph (1) of such [former] section 447(d)) owned, on October 4, 1976 (directly or through the application of such [former] section 447(d)), at least 50 percent of the total combined voting power of all classes of stock of such corporation entitled to vote, and at least 50 percent of the total number of shares of all other classes of stock of such corporation; and substantially all of the stock of such corporation which was not so owned (directly or through the application of such [former] section 447(d)), by members of such three families was owned, on October 4, 1976, directly—
"(I) by employees of the corporation or members of the families (within the meaning of section 267(c)(4) of such Code) of such employees, or
"(II) by a trust for the benefit of the employees of such corporation which is described in section 401(a) of such Code and which is exempt from taxation under section 501(a) of such Code,
the amendments made by paragraph (1) shall apply to taxable years beginning after December 31, 1977."
Accounting for Growing Crops
"(a)
"(1) is a farmer, nurseryman, or florist,
"(2) is on an accrual method of accounting, and
"(3) is not required by section 447 of the Internal Revenue Code of 1954 to capitalize preproductive period expenses.
"(b)
"(c)
"(d)
"(1) shall not require the consent of the Secretary of the Treasury or his delegate, and
"(2) shall be treated, for purposes of section 481 of the Internal Revenue Code of 1954 as a change in the method of accounting initiated by the taxpayer.
"(e)
Automatic Ten-Year Adjustment for Farming Syndicates Changing to Accrual Accounting
"(A) a farming syndicate (within the meaning of [former] section 464(c) of the Internal Revenue Code of 1954 [now
"(B) such syndicate elects an accrual method of accounting (including the capitalization of preproductive period expenses described in section 447(b) of such Code) for a taxable year beginning before January 1, 1979,
then such election shall be treated as having been made with the consent of the Secretary of the Treasury or his delegate and, under regulations prescribed by the Secretary of the Treasury or his delegate, the net amount of the adjustments required by section 481(a) of such Code to be taken into account by the taxpayer in computing taxable income shall be taken into account in each of the 10 taxable years (or the remaining taxable years where there is a stated future life of less than 10 taxable years) beginning with the year of change."
Election To Change From Static Value Method to Accrual Method of Accounting
"(A)
"(i) a corporation has computed its taxable income on an annual accrual method of accounting together with a static value method of accounting for deferred costs of growing crops for the 10 taxable years ending with its first taxable year beginning after December 31, 1975,
"(ii) such corporation raises crops which are harvested not less than 12 months after planting, and
"(iii) such corporation elects, within one year after the date of the enactment of this Act [Oct. 4, 1976] and in such manner as the Secretary of the Treasury or his delegate prescribes, to change to the annual accrual method of accounting (within the meaning of section 447(g)(2) [now section 447(e)(2)] of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]) for taxable years beginning after December 31, 1976,
such change shall be treated as having been made with the consent of the Secretary of the Treasury, and, under regulations prescribed by the Secretary of the Treasury or his delegate, the net amount of the adjustments required by section 481(a) of the Internal Revenue Code of 1986 to be taken into account by the taxpayer in computing taxable income shall (except as otherwise provided in such regulations) be taken into account in each of the 10 taxable years beginning with the year of change.
"(B)
"(C)
§448. Limitation on use of cash method of accounting
(a) General rule
Except as otherwise provided in this section, in the case of a—
(1) C corporation,
(2) partnership which has a C corporation as a partner, or
(3) tax shelter,
taxable income shall not be computed under the cash receipts and disbursements method of accounting.
(b) Exceptions
(1) Farming business
Paragraphs (1) and (2) of subsection (a) shall not apply to any farming business.
(2) Qualified personal service corporations
Paragraphs (1) and (2) of subsection (a) shall not apply to a qualified personal service corporation, and such a corporation shall be treated as an individual for purposes of determining whether paragraph (2) of subsection (a) applies to any partnership.
(3) Entities which meet gross receipts test
Paragraphs (1) and (2) of subsection (a) shall not apply to any corporation or partnership for any taxable year if such entity (or any predecessor) meets the gross receipts test of subsection (c) for such taxable year.
(c) Gross receipts test
For purposes of this section—
(1) In general
A corporation or partnership meets the gross receipts test of this subsection for any taxable year if the average annual gross receipts of such entity for the 3-taxable-year period ending with the taxable year which precedes such taxable year does not exceed $25,000,000.
(2) Aggregation rules
All persons treated as a single employer under subsection (a) or (b) of section 52 or subsection (m) or (o) of section 414 shall be treated as one person for purposes of paragraph (1).
(3) Special rules
For purposes of this subsection—
(A) Not in existence for entire 3-year period
If the entity was not in existence for the entire 3-year period referred to in paragraph (1), such paragraph shall be applied on the basis of the period during which such entity (or trade or business) was in existence.
(B) Short taxable years
Gross receipts for any taxable year of less than 12 months shall be annualized by multiplying the gross receipts for the short period by 12 and dividing the result by the number of months in the short period.
(C) Gross receipts
Gross receipts for any taxable year shall be reduced by returns and allowances made during such year.
(D) Treatment of predecessors
Any reference in this subsection to an entity shall include a reference to any predecessor of such entity.
(4) Adjustment for inflation
In the case of any taxable year beginning after December 31, 2018, the dollar amount in paragraph (1) 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 2017" for "calendar year 2016" in subparagraph (A)(ii) thereof.
If any amount as increased under the preceding sentence is not a multiple of $1,000,000, such amount shall be rounded to the nearest multiple of $1,000,000.
(d) Definitions and special rules
For purposes of this section—
(1) Farming business
(A) In general
The term "farming business" means the trade or business of farming (within the meaning of section 263A(e)(4)).
(B) Timber and ornamental trees
The term "farming business" includes the raising, harvesting, or growing of trees to which section 263A(c)(5) applies.
(2) Qualified personal service corporation
The term "qualified personal service corporation" means any corporation—
(A) substantially all of the activities of which involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, and
(B) substantially all of the stock of which (by value) is held directly (or indirectly through 1 or more partnerships, S corporations, or qualified personal service corporations not described in paragraph (2) or (3) of subsection (a)) by—
(i) employees performing services for such corporation in connection with the activities involving a field referred to in subparagraph (A),
(ii) retired employees who had performed such services for such corporation,
(iii) the estate of any individual described in clause (i) or (ii), or
(iv) any other person who acquired such stock by reason of the death of an individual described in clause (i) or (ii) (but only for the 2-year period beginning on the date of the death of such individual).
To the extent provided in regulations which shall be prescribed by the Secretary, indirect holdings through a trust shall be taken into account under subparagraph (B).
(3) Tax shelter defined
The term "tax shelter" has the meaning given such term by section 461(i)(3) (determined after application of paragraph (4) thereof). An S corporation shall not be treated as a tax shelter for purposes of this section merely by reason of being required to file a notice of exemption from registration with a State agency described in section 461(i)(3)(A), but only if there is a requirement applicable to all corporations offering securities for sale in the State that to be exempt from such registration the corporation must file such a notice.
(4) Special rules for application of paragraph (2)
For purposes of paragraph (2)—
(A) community property laws shall be disregarded,
(B) stock held by a plan described in section 401(a) which is exempt from tax under section 501(a) shall be treated as held by an employee described in paragraph (2)(B)(i), and
(C) at the election of the common parent of an affiliated group (within the meaning of section 1504(a)), all members of such group may be treated as 1 taxpayer for purposes of paragraph (2)(B) if 90 percent or more of the activities of such group involve the performance of services in the same field described in paragraph (2)(A).
(5) Special rule for certain services
(A) In general
In the case of any person using an accrual method of accounting with respect to amounts to be received for the performance of services by such person, such person shall not be required to accrue any portion of such amounts which (on the basis of such person's experience) will not be collected if—
(i) such services are in fields referred to in paragraph (2)(A), or
(ii) such person meets the gross receipts test of subsection (c) for all prior taxable years.
(B) Exception
This paragraph shall not apply to any amount if interest is required to be paid on such amount or there is any penalty for failure to timely pay such amount.
(C) Regulations
The Secretary shall prescribe regulations to permit taxpayers to determine amounts referred to in subparagraph (A) using computations or formulas which, based on experience, accurately reflect the amount of income that will not be collected by such person. A taxpayer may adopt, or request consent of the Secretary to change to, a computation or formula that clearly reflects the taxpayer's experience. A request under the preceding sentence shall be approved if such computation or formula clearly reflects the taxpayer's experience.
(6) Treatment of certain trusts subject to tax on unrelated business income
For purposes of this section, a trust subject to tax under section 511(b) shall be treated as a C corporation with respect to its activities constituting an unrelated trade or business.
(7) Coordination with section 481
Any change in method of accounting made pursuant to this section shall be treated for purposes of section 481 as initiated by the taxpayer and made with the consent of the Secretary.
(8) Use of related parties, etc.
The Secretary shall prescribe such regulations as may be necessary to prevent the use of related parties, pass-thru entities, or intermediaries to avoid the application of this section.
(Added
Inflation Adjusted Items for Certain Years
For inflation adjustment of certain items in this section, see Revenue Procedures listed in a table under
Editorial Notes
Amendments
2017—Subsec. (b)(3).
Subsec. (c).
"(1)
Subsec. (c)(4).
Subsec. (d)(7).
2002—Subsec. (d)(5).
1988—Subsec. (c)(3)(D).
Subsec. (d)(2).
Subsec. (d)(2)(B).
Subsec. (d)(3).
Subsec. (d)(4)(C).
Subsec. (d)(8).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date of 2002 Amendment
"(1)
"(2)
"(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 of 4 years (or if less, the number of taxable years that the taxpayer used the method permitted under section 448(d)(5) of such Code as in effect before the date of the enactment of this Act) beginning with such first taxable year."
Effective Date of 1988 Amendment
Amendment by section 1008(a)(1), (2), (7)–(9) of
Effective Date
"(1)
"(2)
"(3)
"(A) contracts for the acquisition or transfer of real property, and
"(B) contracts for services related to the acquisition or development of real property,
but only if such contracts were entered into before September 25, 1985, and the sole element of the contract which has not been performed as of September 25, 1985, is payment for such property or services.
"(4)
"(A) was incorporated in the State of Delaware in 1970,
"(B) was the successor to a corporation that was incorporated in the State of Illinois in 1949, and
"(C) used a method of accounting for long-term contracts of accounting [sic] for a substantial part of its income from the performance of engineering services.
"(5)