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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations i In general.
ii Definition of gross receipts to determine de minimis production activities.
iii Example.
b Reserved.

1.263A4 Rules for Property Produced in a Farming Business.
a
3 Exemption for certain small business taxpayers.

d Election not to have section 263A apply under section 263Ad3.

5 Revocation of section 263Ad3
election to permit exemption under section 263Ai.
6 Change from applying exemption under section 263Ai to making a section 263Ad3 election.

e
5 Special temporary rule for citrus plants lost by reason of casualty.
f Change in method of accounting.

g Effective date.
1 In general.
2 Changes made by Tax Cuts and Jobs Act Pub. L. 11597.
1.263A7 Changing a method of accounting under section 263A.
a
4 Applicability dates.
i In general.
ii Changes made by Tax Cuts and Jobs Act Pub. L. 11597.

Par. 3. Section 1.263A1 is amended by:
1. Revising paragraph a2 subject heading.
2. In paragraph a2i, revising the second sentence and adding a new third sentence.
3. Revising paragraph b1.
4. In the second sentence of paragraph d3iiB1, the language 1.263A
3b is removed and the language 1.263A1jis added in its place.
5. Redesignating paragraphs j through l as paragraphs k through m.
6. Adding a new paragraph j.
7. In newly-redesignated paragraph m, adding paragraph m6.
The revisions and addition read as follows:

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1.263A1

Uniform capitalization of costs.

a
2 Applicability dates. i In the case of property that is inventory in the hands of the taxpayer, however, these sections are applicable for taxable years beginning after December 31, 1993. The small business taxpayer exception described in paragraph b1
of this section and set forth in paragraph
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j of this section is applicable for taxable years beginning after December 31, 2017.

b 1 Small business taxpayers. For taxable years beginning after December 31, 2017, see section 263Ai and paragraph j of this section for an exemption for certain small business taxpayers from the requirements of section 263A.

j Exemption for certain small business taxpayers1 In general. A
taxpayer, other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448a3, that meets the gross receipts test under section 448c and 1.4482c section 448c gross receipts test for any taxable year small business taxpayer is not required to capitalize costs under section 263A to any real or tangible personal property produced, and any real or personal property described in section 1221a1 acquired for resale, during that taxable year. This section 448c gross receipts test applies even if the taxpayer is not otherwise subject to section 448a.
2 Application of the section 448c gross receipts testi In general. In the case of any taxpayer that is not a corporation or a partnership, and except as provided in paragraphs j2ii and iii of this section, the section 448c gross receipts test is applied in the same manner as if each trade or business of the taxpayer were a corporation or partnership.
ii 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 business 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.
iii Partners and S corporation shareholders. 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
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265

of gross income that were taken into account by the partnership under section 703. Similarly, a shareholder of an S corporation includes such shareholders pro rata share of S
corporation gross receipts taken into account by the S corporation under section 1363b.
iv Examples. The operation of this paragraph j is illustrated by the following examples:
A Example 1. Taxpayer A is an individual who operates two separate and distinct trades or business that are reported on Schedule C, Profit or Loss from Business, of As 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 j2ii of this section, for 2020, neither of As trades or businesses meets the gross receipts test of paragraph j2 of this section $5
million + $35 million = $40 million, which is greater than the inflationadjusted gross receipts test amount for 2020, which is $26 million.
B Example 2. Taxpayer B is an individual who operates three separate and distinct trades or business that are reported on Schedule C of Bs 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 j2ii of this section, Bs gross receipts are the combined amount derived from all three of Bs trades or businesses. Therefore, for 2020, X, Y and Z do not meet the gross receipts test of paragraph j2i 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 Change in method of accounting i In general. A change from applying the small business taxpayer exemption under paragraph j of this section to not applying the exemption under this paragraph j, or vice versa, is a change in method of accounting under section 446e and 1.4461e. A taxpayer changing its method of accounting under paragraph j of this section may do so only with the consent of the Commissioner as required under section 446e and 1.4461. In the case of any taxpayer required by this section to change its method of accounting for any taxable year, the change shall be treated as a change initiated by the taxpayer.
For rules relating to the clear reflection
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