Qualifying for the Cash Method: Revenue Procedure 2002-28

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Qualifying For the Cash Method

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.

Dollar Test
Eligible Business Activity Test

1) The Dollar Test:

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.

Test Years

Test Years	If Your Current Year is...
1998-2000	2001
1999-2001	2002
2000-2002	2003
2001-2003	2004
2002-2004	2005
2003-2005	2006
2004-2006	2007
2005-2007	2008
2006-2008	2009
2007-2009	2010
2008-2010	2011
2009-2011	2012
2010-2012	2013

Example #1:

Your current tax year is 2012.
- Your gross receipts for the three prior years are::
  - 2009 gross receipts: $6 million
  - 2010 gross receipts: $9 million
  - 2011 gross receipts: $12 million

Result:

Average annual gross receipts for the three prior years are $9 million ($27 million divided by 3).

Example #2:

Using the above example, assume you had the same gross receipts for 2009 ($6 million) and 2010 ($9 million). But for 2011 your business had gross receipts of $16 million.

Result:

The cash method would not be permitted.
Your average annual gross receipts exceeded $10 million.
- $31 million divided by 3 equals $10,333,333.

Ineligible Activities:

Retail trade: Code 44 and 45
Wholesale trade: Code 42
Manufacturing: Code 31-33
Mining activity: Code 211-212
Information industries: Code 5111 and 5122
- Examples: Newspapers, books, periodicals, database publishers and sound-recording.
Information about NAICS codes can be found at www.census.gov.

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.

Custom Manufacturing:

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.

Caution!

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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Qualifying For the Cash Method

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