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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations apply to taxable years beginning before January 1, 2018. See 1.4482 for rules relating to taxable years beginning after December 31, 2017.

h 1 The rules provided in paragraph h of this section apply to taxable years beginning before January 1, 2018. See 1.4482 for rules relating to taxable years beginning after December 31, 2017.

1.4482

Redesignated as 1.4483

Par. 14. Section 1.4482 is redesignated as 1.4483.
Par. 15. A new 1.4482 is added to read as follows:

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1.4482 Limitation on the use of the cash receipts and disbursements method of accounting for taxable years beginning after December 31, 2017.

a Limitation on method of accounting1 In general. The rules of this section relate to the limitation on the use of the cash receipts and disbursements method of accounting cash method by certain taxpayers applicable for taxable years beginning after December 31, 2017. For rules applicable to taxable years beginning before January 1, 2018, see 1.4481
and 1.4481T.
2 Limitation rule. Except as otherwise provided in this section, the computation of taxable income using the cash method is prohibited in the case of a:
i C corporation;
ii Partnership with a C corporation as a partner, or a partnership that had a C corporation as a partner at any time during the partnerships taxable year beginning after December 31, 1986; or iii Tax shelter.
3 Treatment of combination methodsi In general. For purposes of this section, the use of a method of accounting that records some, but not all, items on the cash method is considered the use of the cash method.
Thus, a C corporation that uses a combination of accounting methods including the use of the cash method is subject to this section.
ii Example. The following example illustrates the operation of this paragraph a3. In 2020, A is a C
corporation with average annual gross receipts for the prior three taxable years of greater than $30 million, is not a tax shelter under section 448a3 and does not qualify as a qualified personal service corporation, as defined in paragraph e of this section. For the last 20 years, A used an accrual method for items of income and expenses related to purchases and sales of inventory, and
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the cash method for items related to its provision of services. A is using a combination of accounting methods that include the cash method. Thus, A is subject to section 448. A is prohibited from using the cash method for any item for 2020 and is required to change to a permissible method.
b Definitions. For purposes of this section 1 C corporationi In general. The term C corporation means any corporation that is not an S corporation as defined in section 1361a1. For example, a regulated investment company as defined in section 851 or a real estate investment trust as defined in section 856 is a C corporation for purposes of this section. In addition, a trust subject to tax under section 511b is treated, for purposes of this section, as a C corporation, but only with respect to the portion of its activities that constitute an unrelated trade or business. Similarly, for purposes of this section, a corporation that is exempt from Federal income taxes under section 501a is treated as a C
corporation only with respect to the portion of its activities that constitute an unrelated trade or business. Moreover, for purposes of determining whether a partnership has a C corporation as a partner, any partnership described in paragraph a2ii of this section is treated as a C corporation. Thus, if partnership ABC has a partner that is a partnership with a C corporation, then, for purposes of this section, partnership ABC is treated as a partnership with a C corporation partner.
ii Reserved 2 Tax shelteri In general. The term tax shelter means any A Enterprise, other than a C
corporation, if at any time, including taxable years beginning before January 1, 1987, interests in such enterprise have been offered for sale in any offering required to be registered with any Federal or state agency having the authority to regulate the offering of securities for sale;
B Syndicate, within the meaning of paragraph b2iii of this section; or C Tax shelter, within the meaning of section 6662d2C.
ii Requirement of registration. For purposes of paragraph b2iA of this section, an offering is required to be registered with a Federal or state agency if, under the applicable Federal or state law, failure to register the offering would result in a violation of the applicable Federal or state law. This rule applies regardless of whether the offering is in fact registered. In addition, an offering is required to be registered with a Federal or state agency if, under
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the applicable Federal or state law, failure to file a notice of exemption from registration would result in a violation of the applicable Federal or state law, regardless of whether the notice is in fact filed. However, an S corporation is not treated as a tax shelter for purposes of section 448d3 or this section merely by reason of being required to file a notice of exemption from registration with a state agency described in section 461i3A, but only if all corporations offering securities for sale in the state must file such a notice in order to be exempt from such registration.
iii SyndicateA In general. For purposes of paragraph b2iB of this section, the term syndicate means a partnership or other entity other than a C corporation if more than 35 percent of the losses of such entity during the taxable year for taxable years beginning after December 31, 1986 are allocated to limited partners or limited entrepreneurs. For purposes of this paragraph b2iii, the term limited entrepreneur has the same meaning given such term in section 461k4. In addition, in determining whether an interest in a partnership is held by a limited partner, or an interest in an entity or enterprise is held by a limited entrepreneur, section 461k2 applies in the case of the trade or business of farming as defined in paragraph d2
of this section, and section 1256e3C applies in all other cases.
Moreover, for purposes of paragraph b2 of this section, the losses of a partnership, entity, or enterprise entities means the excess of the deductions allowable to the entities over the amount of income recognized by such entities under the entities method of accounting used for Federal income tax purposes determined without regard to this section. For this purpose, gains or losses from the sale of capital assets or assets described in section 1221a2 are not taken into account.
B Irrevocable annual election to test the allocation of losses from prior taxable year1 In general. For purposes of paragraph b2iiiA of this section, to determine if more than 35 percent of the losses of a venture are allocated to limited partners or limited entrepreneurs, entities may elect to use the allocations made in the immediately preceding taxable year instead of using the current taxable years allocation. An election under this paragraph b2iiiB applies only to the taxable year for which the election is made.
Except as otherwise provided in guidance published in the Internal Revenue Bulletin see 601.601d2 of this chapter, a taxpayer that makes an
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