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Rates are set by fiscal year, effective October 1 each year. Find current rates in the continental United States ("CONUS Rates").
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
Here's a handy flow chart from the IRS dealing with the application of Rev. Proc. 2002-28.
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
| Tax Year: | Test Year |
|---|---|
| 2022 | 2019-2021 |
| 2021 | 2018-2020 |
| 2020 | 2017-2019 |
| 2019 | 2016-2018 |
| 2018 | 2015-2017 |
Example 1:
Current tax year, 2022. Gross receipts for three prior years are:
- 2021 gross receipts: $12 million
- 2020 gross receipts: $9 million
- 2019 gross receipts: $6 million
Average annual gross receipts for the three prior years are $9 million ($27 million / 3). Since average annual gross receipts for the three prior years did not exceed $10 million, the cash method is permitted.
Example 2:
- Using the above example, assume you had the same gross receipts for 2019 ($6 million) and 2020 ($9 million). But for 2021, gross receipts were $16 million instead of $12 million.
Since average annual gross receipts for the three prior years exceeded $10 million ($31 million / 3 = $10,333,333), the cash method is not permitted.
Eligible Business Activity Test
Certain activities are prohibited from using the cash method
Prohibited Activities and their NAICS code (North American Industry Classification System) include:
- 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, only the largest percentage.
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.
You must use a separate set of books to account for each separate activity
Caution!
If your business had previously changed from the cash method to the 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.