26 U.S.C. § 448 — Limitation on use of cash method of accounting

(a) General rule -- Except as this section otherwise provides, none of these can compute taxable income under the cash receipts and disbursements method: (1) a C corporation, (2) a partnership which has a C corporation as a partner, or (3) a tax shelter. (b) Exceptions (1) Farming business -- (a)(1) and (2) don't apply to any farming business. (2) Qualified personal service corporations -- (a)(1) and (2) don't apply to a "qualified personal service corporation." Such a corporation is treated as an individual when deciding whether (a)(2) applies to a partnership it belongs to. (3) Entities which meet gross receipts test -- (a)(1) and (2) don't apply to a corporation or partnership for a tax year if that entity, or a predecessor, passes the gross-receipts test in (c) for that year. (c) Gross receipts test (1) In general -- A corporation or partnership passes this test for a tax year if its average annual gross receipts for the 3-tax-year period ending with the year before that tax year don't exceed $25,000,000. (2) Aggregation rules -- All persons treated as a single employer under section 52(a) or (b), or section 414(m) or (o), are treated as one person for (1). (3) Special rules (A) Not in existence for entire 3-year period -- If the entity wasn't in existence for the whole 3-year period, (1) is applied based on however long it (or its trade or business) did exist. (B) Short taxable years -- Gross receipts for a tax year under 12 months are annualized: multiply the short period's gross receipts by 12 and divide by the number of months in the short period. (C) Gross receipts -- Gross receipts for any tax year are reduced by that year's returns and allowances. (D) Treatment of predecessors -- Any mention of an "entity" in this subsection includes a reference to any predecessor of that entity. (4) Adjustment for inflation -- For tax years beginning after December 31, 2018, the $25,000,000 figure in (1) is increased by a cost-of-living adjustment (figured under section 1(f)(3) for that calendar year, substituting "calendar year 2017" for "calendar year 2016"). If the adjusted amount isn't a multiple of $1,000,000, it's rounded to the nearest multiple of $1,000,000. (d) Definitions and special rules (1) Farming business (A) In general -- "farming business" means the trade or business of farming, within the meaning of section 263A(e)(4). (B) Timber and ornamental trees -- "farming business" also includes raising, harvesting, or growing trees to which section 263A(c)(5) applies. (2) Qualified personal service corporation -- This means a corporation where: (A) substantially all its activities involve performing services in health, law, engineering, architecture, accounting, actuarial science, the performing arts, or consulting, and (B) substantially all its stock (by value) is held, directly or indirectly through one or more partnerships, S corporations, or other qualified personal service corporations (not otherwise described in (a)(2) or (3)), by: (i) employees performing services for the corporation in connection with a field named in (A); (ii) retired employees who had performed such services for the corporation; (iii) the estate of anyone described in (i) or (ii); or (iv) anyone else who acquired the stock because of the death of a person described in (i) or (ii) -- but only for the 2-year period beginning on the date of that person's death. To the extent regulations the Secretary prescribes provide, indirect stock holdings through a trust count under (B) too. (3) Tax shelter defined -- "Tax shelter" has the meaning given in section 461(i)(3) (applying paragraph (4) of that section too). An S corporation isn't treated as a tax shelter merely because it must file a notice of exemption from registering with a state agency under section 461(i)(3)(A) -- but only if every corporation offering securities for sale in that state must file that same notice to claim the exemption. (4) Special rules for application of paragraph (2) -- For (2): (A) community property laws are disregarded; (B) stock held by a retirement plan described in section 401(a) that's tax-exempt under section 501(a) is treated as held by an employee described in (2)(B)(i); and (C) the common parent of an affiliated group (within the meaning of section 1504(a)) may elect to treat all members of the group as one taxpayer for (2)(B), if 90 percent or more of the group's activities are in the same field described in (2)(A). (5) Special rule for certain services (A) In general -- A person using an accrual method for amounts to be received for services doesn't have to accrue the portion that, based on that person's own experience, won't be collected -- if either (i) the services are in a field listed in (2)(A), or (ii) the person passes the gross-receipts test in (c) for all prior tax years. (B) Exception -- This doesn't apply to any amount if interest must be paid on it, or if there's a penalty for paying it late. (C) Regulations -- The Secretary must prescribe regulations letting taxpayers determine the uncollectible amount in (A) using computations or formulas that, based on experience, accurately reflect the income that won't be collected. A taxpayer may adopt, or ask the Secretary's consent to change to, a computation or formula that clearly reflects its experience; such a request must be approved if the formula clearly reflects the taxpayer's experience. (6) Treatment of certain trusts subject to tax on unrelated business income -- A trust taxed under section 511(b) is treated, for its unrelated trade or business activities, as a C corporation for purposes of this section. (7) Coordination with section 481 -- Any accounting method change made because of this section is treated, for section 481 purposes, as started by the taxpayer and made with the Secretary's consent. (8) Use of related parties, etc. -- The Secretary must prescribe regulations necessary to prevent the use of related parties, pass-through entities, or other intermediaries to avoid this section.