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Updated for 2012
Revenue Procedure 2002-28:
As of December 31, 2001 Revenue Procedure 2002-28 expanded the number of small businesses eligible to use the cash method.
To qualify for the cash method under Revenue Procedure 2002-28, your business must meet two tests.
Under Revenue Procedure 2002-28, to be a qualifying small business taxpayer, your average annual gross receipts for the previous three years cannot exceed $10 million.
Average annual gross receipts is determined by adding the previous three years' gross receipts and dividing by three.
This three-year averaging test for gross receipts began in tax year 2000. So, if you began business operations anytime during tax year 2000 or later, the three-year averaging test applies.
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Your principal business activity is the activity that produces the largest percentage of gross receipts in the prior year or the largest average percentage over the three prior years.
It is not necessary for the principal activity to produce more than 50% of gross receipts if your business has more than two activities.
For example, if your business has three activities and one produces 40% of gross receipts and the other two produce 30% each, the one that produced 40% is the principal activity.
If your principal activity is custom manufacturing, this means, your principal business activity is the fabrication or modification of tangible personal property upon demand in accordance with customer design or specifications.
If your business had previously changed from the cash method to an accrual method as a result of becoming ineligible to use the cash method under Revenue Procedure 2002-28, it may not change back to the cash method.
Accounting Methods-Cash Method: Taxpayers Allowed to Use the Cash Method
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