§ 448. Limitation on use of cash method of accounting
(a)
General rule
Except as otherwise provided in this section, in the case of a—
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 with gross receipts of not more than $5,000,000
Paragraphs (1) and (2) of subsection (a) shall not apply to any corporation or partnership for any taxable year if, for all prior taxable years beginning after December 31, 1985, such entity (or any predecessor) met the $5,000,000 gross receipts test of subsection (c).
(c)
$5,000,000 gross receipts test
For purposes of this section—
(1)
In general
A corporation or partnership meets the $5,000,000 gross receipts test of this subsection for any prior taxable year if the average annual gross receipts of such entity for the 3-taxable-year period ending with such prior taxable year does not exceed $5,000,000.
(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.
(d)
Definitions and special rules
For purposes of this section—
(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),
(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)—
(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—
(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.
(7)
Coordination with section
481
In the case of any taxpayer required by this section to change its method of accounting for any taxable year—