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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations B Accordingly, the reallocation of contract income under the look-back method results in an increase of income for AMT purposes for 2017 of $250
$500$250. Under the simplified marginal impact method, X applies the highest rate of tax under section 55b1
to this increase, which produces a hypothetical underpayment for 2017 of $50 .20 $250. Interest is charged to X on this $50 underpayment from the due date of Xs 2017 return until the due date of Xs 2019 return. X, a C
corporation, is not subject to the AMT
in 2018. X does not compute alternative minimum taxable income or use the PCM in that year. Accordingly, lookback does not apply to 2018.

k Applicability date. Paragraphs b2, b2ii, b3iii, c1i, c2i, c2iv, c3ii, c3vi, d2i, d4iA, and h8iii of this section apply to taxable years beginning on or after January 5, 2021.
However, for a taxable year beginning after December 31, 2017, and before January 5, 2021, a taxpayer may apply the paragraphs described in the first sentence of this paragraph k, provided that the taxpayer follows all the applicable rules contained in the regulations under section 460 for such taxable year and all subsequent taxable years. Further, a taxpayer may apply those portions of paragraphs b2ii and b3iii of this section that relate to section 460e1B for contracts entered into after December 31, 2017, in a taxable year ending after December 31, 2017, provided that the taxpayer follows all the applicable rules contained in the regulations under section 460 for such taxable year and all subsequent taxable years.
Par. 23. 1.4711 is amended by:
1. Designating the undesignated paragraph as paragraph a.
2. Adding a heading to newly designated paragraph a and revising the first sentence.
3. Adding paragraphs b and c.
The revision and addition read as follows:

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1.4711

Need for inventories.

a In general. Except as provided in paragraph b of this section, in order to reflect taxable income correctly, inventories at the beginning and end of each taxable year are necessary in every case in which the production, purchase, or sale of merchandise is an incomeproducing factor.
b Exemption for certain small business taxpayers1 In general.
Paragraph a of this section shall not apply to a taxpayer, other than a tax
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shelter prohibited from using the cash receipts and disbursements method of accounting cash method under section 448a3, in any taxable year if the taxpayer meets the gross receipts test described in paragraph b2 of this section, and uses as a method of accounting for its inventory a method that is described in paragraph b3 of this section.
2 Gross receipts testi In general.
A taxpayer, other than a tax shelter prohibited from using the cash method under section 448a3, meets the gross receipts test of this paragraph b2 if it meets the gross receipts test of section 448c and 1.4482c. This gross receipts test applies even if the taxpayer is not otherwise subject to section 448a.
ii Application of the gross receipts testA In general. In the case of any taxpayer that is not a corporation or partnership, and except as otherwise provided in paragraphs b2iiB and C of this section, the gross receipts test of section 448c and the accompanying regulations are applied in the same manner as each trade or business of the taxpayer were a corporation or partnership.
B Gross receipts of individuals, etc.
Except when the aggregation rules of section 448c2 apply, the gross receipts of a taxpayer other than a corporation or partnership are the amount derived from all trades or businesses of such taxpayer. Amounts not related to a trade or businesses are excluded from the gross receipts of the taxpayer. For example, an individual taxpayers gross receipts do not include inherently personal amounts, such as:
personal injury awards or settlements with respect to an injury of the individual taxpayer, disability benefits, Social Security benefits received by the taxpayer during the taxable year, and wages received as an employee that are reported on Form W2.
C Partners and S corporation shareholders1 In general. Except when the aggregation rules of section 448c2 apply, each partner in a partnership includes a share of the partnerships gross receipts in proportion to such partners distributive share as determined under section 704
of items of gross income that were taken into account by the partnership under section 703. Similarly, a shareholder includes the pro rata share of S
corporation gross receipts taken into account by the S corporation under section 1363b.
2 Reserved D Examples. The operation of this paragraph b2 is illustrated by the following examples:

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1 Example 1. Taxpayer A, a calendar year S corporation, is a reseller and maintains inventories. In 2017, 2018, and 2019, As gross receipts were $10
million, $11 million, and $13 million respectively. A is not prohibited from using the cash method under section 448a3. For 2020, A meets the gross receipts test of paragraph b2 of this section.
2 Example 2. Taxpayer B operates two separate and distinct trades or businesses that are reported on Schedule C, Profit or Loss from Business, of Bs Federal income tax return. For 2020, one trade or business has annual average gross receipts of $5
million, and the other trade or business has average annual gross receipts of $35
million. Under paragraph b2iiB of this section, for 2020, neither of Bs trades or businesses meets the gross receipts test of paragraph b2 of this section $5 million + $35 million = $40
million, which is greater than the inflation-adjusted gross receipts test amount for 2020, which is $26 million.
3 Example 3. Taxpayer C is an individual who operates three separate and distinct trades or business that are reported on Schedule C of Cs Federal income tax return. For 2020, Business X
is a retail store with average annual gross receipts of $15 million, Business Y is a dance studio with average annual gross receipts of $6 million, and Business Z is a car repair shop with average annual gross receipts of $12
million. Under paragraph b2iiB of this section, Cs gross receipts are the combined amount derived from all three of Cs trades or businesses. Therefore, for 2020, X, Y and Z do not meet the gross receipts test of paragraph b2i of this section $15 million + $6 million + $12 million = $33 million, which is greater than the inflation-adjusted gross receipts test amount for 2020, which is $26 million.
3 Methods of accounting under the small business taxpayer exemption. A
taxpayer eligible to use, and that chooses to use, the exemption described in paragraph b of this section may account for its inventory by either:
i Using a method that treats its inventory as non-incidental materials and supplies section 471c NIMS
inventory method, as described in paragraph b4 of this section; or ii Using the method for each item that is reflected in the taxpayers applicable financial statement AFS
AFS section 471c inventory method;
or, if the taxpayer does not have an AFS
for the taxable year, the books and records of the taxpayer prepared in accordance with the taxpayers accounting procedures, as defined in
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