Tax Basics for Startups

Taxpayers Prohibited From Using the Cash Method

The following taxpayers are prohibited from using the cash method:
  1. If your business's average annual gross receipts exceed for the prior three years exceed $10 million.
  2. C corporations and partnerships with C corporations as a partner with average annual gross receipts exceeding $5 million at any time after 1985.
  3. Tax Shelters may not use the cash method.
  4. Tax-exempt trusts with unrelated business income.
Principal business activities prohibited in Revenue Procedure 2002-28:
  1. Retail trade: NAICS Code: 44-45
  2. Wholesale trade: NAICS Code: 42
  3. Manufacturing: NAICS Code: 31-33
  4. Mining activity: NAICS Code: 211-212
  5. Information industries: NAICS Code: 5111-5122
NAICS codes:

You determine your principal business activity by reference to the North American Industry Classification System (NAICS) code published by the Department of Commerce (www.census.gov).

Principal Business Activity:

The Principal activity of a business refers to the business activity that produces the largest percentage of gross receipts in the prior year or the largest average percentage over the three prior years.