Businesses that must account for inventories and that have a three-year average of $1 million or less in gross receipts now have an option of using the cash method of accounting. Effective for tax years ending in December 1999, a new Revenue Procedure may result in tax savings for many small businesses.

The IRS has issued Revenue Procedure 2000-22 which provides an exception to the accrual accounting rules for small taxpayers, which are defined as taxpayers with average annual gross receipts of $1 million or less. To determine if a business qualifies for this threshold, gross receipts must be averaged for the past three years.

Taxpayers who meet the three-year, under $1 million requirement, have the right to account for purchases of inventory and materials in the same way as other cash basis taxpayers, and may record income when it is received rather than when it is earned.

If the three-year average of gross receipts of a taxpayer using this cash reporting option exceeds $1 million in a future year, the taxpayer must revert to the accrual method of accounting.

The IRS will automatically approve the accounting changes if the taxpayer files Form 3115, Application for Change in Accounting Method. Taxpayers who want to take advantage of this new ruling have until 11/13/00 to amend 1999 tax returns.