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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations
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are otherwise subject to general rules under sections 263A, 448, 460, or 471.
A. Section 263A
The Treasury Department and the IRS
expect that the addition of section 263Ai will expand the number of small business taxpayers exempted from the requirement to capitalize costs, including interest, under section 263A.
Under section 263Ai, taxpayers other than tax shelters that meet the $25
million adjusted for inflation gross receipts test in section 448c can choose to deduct certain costs that are otherwise required to be capitalized to the basis of property. Section 263A
applies to taxpayers that are producers, resellers, and taxpayers with selfconstructed assets. 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 adjusted for inflation that have inventories. The Treasury Department and the IRS estimate that of these taxpayers there are between 28,900 and 38,900 respondents with gross receipts of not more than $25 million adjusted for inflation that are eligible to change their method of accounting to no longer capitalize costs under section 263A.
These estimates come from information collected on: Form 1125A, Cost of Goods Sold, and attached to Form 1120, U.S. Corporation Income Tax Return, Form 1065, U.S. Return of Partnership Income or Form 1120S, U.S. Income Tax Return for an S Corporation, on which the taxpayer also indicated it had additional section 263A costs. The Treasury Department and the IRS do not have readily available data to measure the prevalence of entities with selfconstructed assets. In addition, these data also do not include other business entities, such as a business reported on Schedule C, Profit or Loss Form Business, of an individuals Form 1040, U.S. Individual Income Tax Return.
Under section 263A, as modified by the TCJA, small business entities that qualified for Section 263A small reseller exception will no longer be able to use this exception. The Treasury Department and the IRS estimate that nearly all taxpayers that qualified for the small reseller exception will qualify for the small business taxpayer exemption under section 263Ai since the small reseller exception utilized a $10 million gross receipts test. The Treasury Department and the IRS
estimate that there are between 28,900
and 38,900 respondents with gross receipts of not more than $25 million that are eligible for the exemption under section 263Ai. These estimates come
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from information collected on: Form 1125A, Cost of Goods Sold, and attached to Form 1120, U.S. Corporation Income Tax Return, Form 1065, U.S.
Return of Partnership Income or Form 1120S, U.S. Income Tax Return for an S Corporation on which the taxpayer also indicated it had additional section 263A costs. These data provide an upper bound for the number of taxpayers affected by the repeal of the small reseller exception and enactment of section 263Ai because the data includes taxpayers that were not previously eligible for the small reseller exception, such as producers and taxpayers with gross receipts of more than $10 million.
The regulations modify the $50
million gross receipts test in 1.263A
1d3iiB1 by using the Section 448
Gross Receipts Test. The $50 million gross receipts amount is used by taxpayers to determine whether they are eligible to treat negative adjustments as additional section 263A costs for purposes of the simplified production method SPM under section 263A. The Treasury Department and the IRS do not have readily available data to measure the prevalence of entities using the SPM.
Section 1.263A9 modifies the current regulation to increase the eligibility threshold to $25 million for the election permitting taxpayers to use the highest applicable Federal rate as a substitute for the weighted average interest rate when tracing debt for purposes of capitalizing interest under section 263Af. The Treasury Department and the IRS estimate that there are between 28,900 and 38,900
respondents with gross receipts of not more than $25 million that are eligible to make this election. These estimates come from information collected on:
Form 1125A, Cost of Goods Sold, attached to Form 1120, U.S. Corporation Income Tax Return, Form 1065, U.S.
Return of Partnership Income or Form 1120S, U.S. Income Tax Return for an S Corporation, on which the taxpayer also indicated it had additional section 263A costs. The Treasury Department and the IRS expect that many taxpayers eligible to make the election for purposes of section 263Af will instead elect the small business exemption under section 263Ai. Additionally, taxpayers who chose to apply section 263A even though they qualify for the small business exemption under section 263Ai may not have interest expense required to be capitalized under section 263Af. As a result, although these data do not include taxpayers with selfconstructed assets that are eligible for the election, the Treasury Department
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and the IRS estimate that this data provides an upper bound for the number of eligible taxpayers.
B. Section 448
The Treasury Department and the IRS
expect that the changes to section 448c by the TCJA will expand the number of taxpayers permitted to use the cash method. Section 448a provides that C
corporations, partnerships with C
corporations as partners, and tax shelters are not permitted to use the cash method of accounting; however section 448c, as amended by the TCJA, provides that C corporations or partnerships with C corporations as partners, other than tax shelters, are not restricted from using the cash method if their average annual gross receipts are $25 million adjusted for inflation or less. Prior to the amendments made by the TCJA, the applicable gross receipts threshold was $5 million. Section 448
does not apply to S corporations, partnerships without a C corporation partner, or any other business entities including sole proprietorships reported on an individuals Form 1040. The Treasury Department and the IRS
estimate that there are between 587,000
and 605,000 respondents with gross receipts of not more than $5 million presently using an accrual method, and between 70,000 and 76,500 respondents with gross receipts of more than $5
million but not more than $25 million that are permitted to use to the cash method. These estimates come from information collected on 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.
Under the regulations, taxpayers that would meet the gross receipts test of section 448c and seem to be eligible to use the cash method but for the definition of syndicate under section 448d3, may elect to use the allocated taxable income or loss of the immediately preceding taxable year to determine whether the taxpayer is a syndicate for purposes of section 448d3 for the current taxable year.
The Treasury Department and IRS
estimate that 224,165 respondents may potentially make this election. This estimate comes from information collected on the Form 1065, U.S. Return of Partnership Income and Form 1120
S, U.S. Income Tax Return for an S
Corporation., and the Form 1125A, Cost of Goods Sold, attached to the Forms 1065 and 1120S. The Treasury Department and the IRS estimate that these data provide an upper bound for the number of eligible taxpayers because
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