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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations not all taxpayers eligible to make the election will choose to do so.

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C. Section 460
The Treasury Department and the IRS
expect that the modification of section 460e1B by the TCJA will expand the number of taxpayers exempted from the requirement to apply the percentageof-completion method to long-term construction contracts. Under section 460e1B, as modified by the TCJA, taxpayers other than tax shelters that meet the $25 million adjusted for inflation gross receipts test in section 448c are not required to use PCM to account for income from a long-term construction contract expected to be completed in two years. Prior to the modification of section 460e1B by the TCJA, a separate $10 million dollar gross receipts test applied. The Treasury Department and the IRS estimate that there are between 15,400 and 19,500
respondents with gross receipts of between $10 million and $25 million who are eligible to change their method of accounting to apply the modified exemption. This estimate comes from information collected on the Form 1120, U.S. Corporation Income Tax Return, Form 1065, U.S. Return of Partnership Income and Form 1120S, U.S. Income Tax Return for an S Corporation in which the taxpayer indicated its principal business activity was construction NAICS codes beginning with 23. These data available do not distinguish between long-term contracts and other contracts, and also do not include other business entities that do not file Form 1120, U.S. Corporation Income Tax Return, Form 1065, U.S.
Return of Partnership Income, and Form 1120S, U.S. Income Tax Return for an S Corporation, such as a business reported on Schedule C, Profit or Loss from Business, of an individuals Form 1040, U.S. Individual Income Tax Return.
D. Section 471
The Treasury Department and the IRS
expect that the addition of section 471c will expand the number of taxpayers exempted from the requirement to take inventories under section 471a. Under section 471c, taxpayers other than tax shelters that meet the $25 million adjusted for inflation gross receipts test in section 448c can choose to apply certain simplified inventory methods rather than those otherwise required by section 471a. The Treasury Department and the IRS estimate that there are between 3,200,000 and 3,575,000 respondents with gross receipts of not more than $25
million that are exempted from the
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requirement to take inventories, and will treat their inventory either as nonincidental materials and supplies, or conform their inventory method to the method reflected in their AFS, or if they do not have an AFS, in their books and records. This estimate comes from data collected on the Form 1125A, Cost of Goods Sold. Within that set of taxpayers, the Treasury Department and the IRS estimate that there are between 10,500 and 11,500 respondents that may choose to conform their method of accounting for inventories to their method for inventory reflected in their AFS. This estimate comes from IRScollected data on taxpayers that filed the Form 1125A, Cost of Goods Sold, in addition to a Schedule M3, Net Income Loss Reconciliation for Corporations With Total Assets of $10 Million or More, that indicated they had an AFS.
These data provide a lower bound because they do not include other business entities, such as a business reported on Schedule C, Profit or Loss from Business, of an individuals Form 1040, U.S. Individual Income Tax Return, that are not required to file the Form 1125A, Cost of Goods Sold.
4. Projected Reporting, Recordkeeping, Other Compliance Requirements, and Costs The Treasury Department and the IRS
have not performed an analysis with respect to the projected reporting, recordkeeping, and other compliance requirements associated with the statutory exemptions under sections 263A, 448, 460, and 471 and the final regulations implementing these exemptions. The taxpayer may expend time to read and understand the final regulations. The cost to comply with these regulations are reflected in modest reporting activities. Taxpayers needing to make method changes pursuant to these regulations will be required to file a Form 3115. The Treasury Department and the IRS are minimizing the cost to comply with the regulations by providing administrative procedures that allow taxpayers to make multiple changes in method of accounting related to the statutory exemptions under sections 263A, 448, 460, and 471 for the same tax year on a single Form 3115, instead of filing a separate Form 3115
for each exemption. Although there is a nominal implementation cost, the Treasury Department and the IRS
anticipate that the statutory exemptions and the final regulations implementing these exemptions will reduce overall the reporting, recordkeeping, and other compliance requirements of affected taxpayers relative to the requirements that exist under the general rules in
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sections 263A, 448, 460, and 471. For example, a taxpayer that applies section 471c1Bi to treat inventory as nonincidental materials and supplies will only need to capitalize the direct material cost of producing inventory instead of also having to capitalize the direct labor and indirect costs of producing inventory under the general rules of section 471a. Additionally, a taxpayer that applies section 471c1Bii can follow the inventory method used in its applicable financial statement, or its books and records if it does not have an applicable financial statement, in lieu of keeping a separate inventory method under the general rules of section 471a.
5. Steps Taken To Minimize the Economic Impact on Small Entities As discussed earlier in the preamble, section 448 provides a general restriction for C corporations, partnerships with C corporation partners, and tax shelters from using the cash method of accounting, and sections 263A, 460 and 471 impose specific rules on uniform capitalization of direct and indirect production costs, the percentage of completion method for long-term contracts, and accounting for inventory costs, respectively. Section 13102 of TCJA provided new statutory exemptions and expanded the scope of existing statutory exemptions from these rules to reduce compliance burdens for small taxpayers for example, reducing the burdens associated with applying complex accrual rules under section 451
and 461, maintaining inventories, identifying and tracking costs that are allocable to property produced or acquired for resale, identifying and tracking costs that are allocable to longterm contracts, applying the look-back method under section 460, etc.. For example, a small business taxpayer with average gross receipts of $20 million may pay an accountant an annual fee of approximately $2,375 to perform a 25
hour analysis to determine the section 263A costs that are capitalized to inventory produced during the year. If this taxpayer chooses to apply the exemption under section 263A and these regulations, it will no longer need to pay an accountant for the annual section 263A analysis.
The regulations implementing these exemptions are completely voluntary because small business taxpayers may continue using an accrual method of accounting, and applying the general rules under sections 263A, 460 and 471
if they so choose. Thus, the exemptions increase the flexibility small business taxpayers have regarding their accounting methods relative to other
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