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Conference Report Explanation of Tax Provisions in H.R. 2614; Title II -- Small Business Tax Relief

OCT. 26, 2000

H. Rept. 106-1004 for H.R. 2614

DATED OCT. 26, 2000
DOCUMENT ATTRIBUTES
  • Authors
    Armey, Rep. Richard K.
  • Institutional Authors
    House of Representatives
  • Cross-Reference
    For text of H.R. 5542's provisions, see Doc 2000-27538 (286 original

    pages), 2000 TNT 209-8 Database 'Tax Notes Today 2000', View '(Number' and 2000 TNT 209-9 Database 'Tax Notes Today 2000', View '(Number'; or H&D, Special

    Supplement, Oct. 27, 2000.

    For related coverage, see Doc 2000-27773 (7 original pages), 2000 TNT

    209-1 Database 'Tax Notes Today 2000', View '(Number', or H&D, Oct. 27, 2000, p. 1059.
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    budget, federal
    legislation, tax
    corporate tax
    credits
    work opportunity credit
    depreciation, expensing election
    business expense deduction, limits, meals, and entertainment
    accounting methods, cash, limits
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2000-28631 (474 original pages)
  • Tax Analysts Electronic Citation
    2000 TNT 221-27
Citations: H. Rept. 106-1004 for H.R. 2614

 

=============== SUMMARY ===============

 

This issue of Tax Notes Today includes the conference report explanation of tax provisions incorporated into Title II of H.R. 2614, the Small Business Investment Act of 2000, which would provide tax relief for small businesses. The bill would extend the work opportunity credit, increase section 179 expensing, increase the deduction for business meals, and repeal changes to the installment method of accounting.

H.R. 2614 includes provisions of H.R. 5542, the Taxpayer Relief Act of 2000, introduced by House Majority Leader Richard K. Armey, R- Texas. (For text of H.R. 5542's provisions, see Doc 2000-27538 (286 original pages), 2000 TNT 209-8 Database 'Tax Notes Today 2000', View '(Number' and 2000 TNT 209-9 Database 'Tax Notes Today 2000', View '(Number'; or H&D, Special Supplement, Oct. 27, 2000. For related coverage, see Doc 2000-27773 (7 original pages), 2000 TNT 209-1 Database 'Tax Notes Today 2000', View '(Number', or H&D, Oct. 27, 2000, p. 1059.)

 

=============== FULL TEXT ===============

 

TITLE II. SMALL BUSINESS TAX RELIEF PROVISIONS

A. EXTENSION OF THE WORK OPPORTUNITY TAX CREDIT (SEC. 201 OF THE BILL AND SEC. 51 OF THE CODE)

PRESENT LAW

[83] The work opportunity tax credit ("WOTC") is available on an elective basis for employers hiring individuals from one or more of eight targeted groups. The credit generally is equal to 25 percent of qualified first-year wages for employment of at least 120 hours but less than 400 hours and 40 percent of qualified first-year wages for employment of 400 hours or more. Qualified first-year wages consist of wages attributable to service rendered by a member of a targeted group during the one-year period beginning with the day the individual begins work for the employer.

[84] No more than $6,000 of wages during the first year of employment is permitted to be taken into account with respect to any individual. Thus, the maximum credit per individual is $2,400. With respect to qualified summer youth employees, the maximum credit is 40 percent of up to $3,000 of qualified first-year wages, for a maximum credit of $1,200. The credit is only effective for wages paid to, or incurred with respect to, qualified individuals who begin work for the employer before January 1, 2002.

[85] The employer's deduction for wages is reduced by the amount of the credit.

HOUSE BILL

[86] No provision.

SENATE AMENDMENT

[87] No provision. However, H.R. 833, as passed by the Senate, permanently extends the WOTC.

[88] Effective date . -- The provision is effective for wages paid to, or incurred with respect to, qualified individuals who begin work for the employer on or after July 1, 1999. Subsequent to Senate passage of H.R. 833, Public Law 106 170 extended the WOTC for 30 months (through December 31, 2001) and clarified the definition of the first year of employment for purposes of the WOTC.

CONFERENCE AGREEMENT

[89] The conference agreement extends the WOTC for 30 months (through June 30, 2004). It is effective for wages paid to, or incurred with respect to, qualified individuals who begin work for the employer on or after January 1, 2002, and before July 1, 2004.

B. INCREASE THE MAXIMUM DOLLAR AMOUNT OF REFORESTATION EXPENDITURES ELIGIBLE FOR AMORTIZATION AND CREDIT (SEC. 202 OF THE BILL AND SECS. 48(B) AND 194 OF THE CODE)

PRESENT LAW

Amortization of reforestation costs (sec. 194)

[90] A taxpayer may elect to amortize up to $10,000 ($5,000 in the case of a separate return by a married individual) of qualifying reforestation expenditures incurred during the taxable year with respect to qualifying timber property. Amortization is taken over 84 months (seven years) and is subject to a mandatory half-year convention. 41 In the case of an individual, the amortization deduction is allowed in determining adjusted gross income (i.e., an "above-the-line deduction") rather than as an itemized deduction. The amount eligible for amortization has not been increased since the election was added to the Code in 1980. 42

[91] Qualifying reforestation expenditures are the direct costs a taxpayer incurs in connection with the forestation or reforestation of a site by planting or seeding, and include costs for the preparation of the site, the cost of the seed or seedlings, and the cost of the labor and tools (including depreciation of long lived assets such as tractors and other machines) used in the reforestation activity. Qualifying reforestation expenditures do not include expenditures that would otherwise be deductible and do not include costs for which the taxpayer has been reimbursed under a governmental cost sharing program, unless the amount of the reimbursement is also included in the taxpayer's gross income.

[92] Qualifying timber property includes any woodlot or other site that is located in the United States that will contain trees in significant commercial quantities and that is held by the taxpayer for the planting, cultivating, caring for, and cutting of trees for sale or use in the commercial production of timber products. The regulations require that the site consist of at least one acre that is devoted to such activities. 43 A taxpayer may hold qualifying timber property in fee or by lease. Where the property is held by one person for life with the remainder to another person, the life tenant is considered the owner of the property for this purpose.

[93] Reforestation amortization is subject to recapture as ordinary income on sale of qualifying timber property within 10 years of the year in which the qualifying reforestation expenditures were incurred. 44

Reforestation tax credit (sec. 48(b))

[94] A tax credit is allowed equal to 10 percent of the reforestation expenditures incurred during the year that are properly elected to be amortized. An amount allowed as a credit is subject to recapture if the qualifying timber property to which the expenditure relates is disposed of within five years.

HOUSE BILL

[95] No provision, but H.R. 3081 as passed by the House increases the amount of reforestation expenditures eligible for seven-year amortization and the reforestation credit from $10,000 to $25,000 per taxable year (from $5,000 to $12,500 in the case of a separate return by a married individual).

[96] For taxable years beginning in 2001 through 2003, H.R. 3081 removes the limitation on the amount of expenditures eligible for seven-year amortization.

[97] Effective date . -- The provision is effective for expenditures paid or incurred in taxable years beginning after December 31, 2000. For taxable years beginning in 2001, 2002, and 2003, the amount of reforestation expenditures eligible for the credit is limited to $25,000 and no limit applies to the amount of expenditures eligible for seven-year amortization. For taxable years beginning after 2003, the amount of reforestation expenditures eligible for seven-year amortization and for the credit is limited to $25,000.

SENATE AMENDMENT

[98] No provision.

CONFERENCE AGREEMENT

[99] The conference agreement includes the provision in H.R. 3081.

C. CAPITAL GAINS TREATMENT UNDER SECTION 631 (B) TO APPLY TO OUTRIGHT SALES OF TIMBER (SEC. 202(C) OF THE BILL AND SEC. 631(B) OF THE CODE)

PRESENT LAW

[100] Gain on the cutting and sale of timber generally is eligible for capital gains treatment, provided the growing timber has been held for more than one year. If the taxpayer sells the timber at the time it is cut, the capital gain is measured as the difference between the sales price of the timber less cost of sales and any unrecovered costs of growing the timber.

[101] If the taxpayer sells the timber prior to its being cut, a special rule allows the taxpayer to treat the sale as a capital gain, provided the taxpayer retains an economic interest in the timber and holds the timber for more than one year prior to the date of disposal. The date of disposal is deemed to be the date the timber is cut, unless the taxpayer receives payment for the timber prior to the date it is cut and elects to treat the date of payment as the date of disposal.

HOUSE BILL

[102] No provision.

SENATE AMENDMENT

[103] No provision.

CONFERENCE AGREEMENT

[104] In the case of a sale of timber by the owner of the land from which the timber is cut, the requirement that a taxpayer retain an economic interest in the timber in order to treat gains on sales prior to the time the timber is cut as capital gains does not apply. Outright sales of timber by the landowner will qualify for capital gains treatment in the same manner as sales with a retained economic interest qualify under present law, except that the date-of-disposal rule will not apply.

[105] Effective date . -- The provision is effective for sales of timber after the date of enactment.

D. INCREASE SECTION 179 EXPENSING (SEC. 1203 OF THE BILL AND SEC. 179 OF THE CODE)

PRESENT LAW

[106] Present law provides that, in lieu of depreciation, a taxpayer with a sufficiently small amount of annual investment may elect to deduct up to $20,000 (for taxable years beginning in 2000) of the cost of qualifying property placed in service for the taxable year (sec. 179). In general, qualifying property is defined as depreciable tangible personal property that is purchased for use in the active conduct of a trade or business. The $20,000 amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $200,000. In addition, the amount eligible to be expensed for a taxable year may not exceed the taxable income for a taxable year that is derived from the active conduct of a trade or business (determined without regard to this provision). Any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding taxable years (subject to similar limitations).

[107] The $20,000 amount is increased to $25,000 for taxable years beginning in 2003 and thereafter. The increase is phased in as follows: for taxable years beginning in 2001 or 2002, the amount is $24,000; and for taxable years beginning in 2003 and thereafter, the amount is $25,000.

HOUSE BILL

[108] No provision. However, H.R. 3081, as passed by the House, provides that the maximum dollar amount that may be deducted under section 179 is increased to $30,000 for taxable years beginning in 2001 and thereafter.

[109] Effective date . -- The provision is effective for taxable years beginning after December 31, 2000.

SENATE AMENDMENT

[110] No provision. However, H.R. 833, as passed by the Senate, includes a provision identical to the provision of H.R. 3081, as passed by the House.

CONFERENCE AGREEMENT

[111] The conference agreement includes the provision in H.R. 3081 and H.R. 833, with a modification. Under the conference agreement, the maximum dollar amount that may be deducted under section 179 is increased to $35,000 for taxable years beginning in 2001 and thereafter.

E. INCREASE DEDUCTION FOR BUSINESS MEALS (SEC. 204 OF THE BILL AND SEC. 274(N) OF THE CODE)

PRESENT LAW

[112] Ordinary and necessary business expenses, as well as expenses incurred for the production of income, are generally deductible, subject to a number of restrictions and limitations (secs. 162 and 212). No deduction generally is allowed for personal, living, or family expenses (sec. 262).

[113] Meal and entertainment expenses incurred for business reasons or for the production of income are deductible if certain legal and substantiation requirements are met. Generally, the amount allowable as a deduction for business meal and entertainment expenses is limited to 50 percent of the otherwise deductible amount (sec. 274(n)). Exceptions to this 50-percent rule are provided for food and beverages provided to crew members of certain vessels and off-shore oil or gas platforms or drilling rigs, as well as to individuals subject to the hours of service limitations of the Department of Transportation. No deduction is allowed for meal or beverage expenses unless they are not lavish or extravagant under the circumstances (sec. 274(k)(1)(A)). In addition, no deduction is allowed for amounts paid or incurred for membership in any club organized for business, pleasure, recreation, or other social purpose (sec. 274(a)(3)).

[114] An expense for food or beverages is not deductible unless the taxpayer establishes that the item was directly related to the "active conduct" of the taxpayer's trade or business or, in the case of an item directly preceding or following a substantial and bona fide business discussion, that the item was "associated with" the active conduct of the taxpayer's trade or business (sec. 274(a)(1)(A)). Accordingly, a business meal expense generally is not deductible unless there is a substantial and bona fide business discussion during, directly preceding, or directly following the meal. Also, the taxpayer or an employee of the taxpayer must be present at the meal (sec. 274(k)(1)(B)).

[115] Separate requirements apply to deductions with respect to individuals who are traveling away from home in pursuit of a trade or business. The absence of a business discussion is irrelevant for purposes of the "active conduct" and "associated with" tests described above if the individual either has the meal alone or has the meal with other persons provided that no deduction is claimed with respect to those other persons.

[116] No deduction is allowed with respect to business meal and entertainment expenses unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer's own statement (1) the amount of the expense, (2) the time and place of the expense, (3) the business purpose of the expense, and (4) the business relationship of the taxpayer to the persons entertained (sec. 274(d)). The Code authorizes the IRS to provide simpler rules for amounts below a threshold specified by the IRS. Accordingly, the IRS provides standard meal allowances (generally $30 per day, but higher in specified high-cost areas and for employees "in the transportation industry") that taxpayers who are traveling away from home on business may utilize as an alternative to the substantiation procedures specified above (Treas. Reg. sec. 1.274(d) 1T).

HOUSE BILL

[117] No provision. However, H.R. 3081, as passed by the House, increases the business meals deduction from the present-law 50 percent to 55 percent for taxable years beginning in 2001 and to 60 percent for taxable years beginning in 2002 and thereafter. The bill does not alter the 50-percent limitation with respect to the business entertainment deduction.

[118] Effective date . -- The provision is effective for taxable years beginning after December 31, 2000.

SENATE AMENDMENT

[119] No provision. However, H.R. 833, as passed by the Senate, phases in an increase from 50 percent to 80 percent in the deductible percentage of business meal expense for small businesses. The present-law 50 percent limitation continues to apply to entertainment expenses. The increase in the deductible percentage is phased in according to the following schedule:

Deductible

 

 

Taxable years beginning in:                       Deductible

 

                                                  percentage:

 

2001                                                   55

 

2002                                                   60

 

2003                                                   65

 

2004                                                   70

 

2005                                                   75

 

2006 and thereafter                                    80

 

 

[120] Effective date . -- The provision is effective for taxable years beginning after 2000.

CONFERENCE AGREEMENT

[121] The conference agreement increases the business meals deduction from the present-law 50 percent to 70 percent for taxable years beginning after December 31, 2000.

[122] Effective date . -- The provision is effective for taxable years beginning after December 31, 2000.

F. INCREASED DEDUCTION FOR BUSINESS MEALS WHILE OPERATING UNDER DEPARTMENT OF TRANSPORTATION HOURS OF SERVICE LIMITATIONS (SEC. 205 OF THE BILL AND SEC. 274( N) OF THE CODE)

PRESENT LAW

[123] Ordinary and necessary business expenses, as well as expenses incurred for the production of income, are generally deductible, subject to a number of restrictions and limitations. Generally, the amount allowable as a deduction for food and beverage is limited to 50 percent of the otherwise deductible amount. Exceptions to this 50 percent rule are provided for food and beverages provided to crew members of certain vessels and offshore oil or gas platforms or drilling rigs.

[124] The 1997 Act increased to 80 percent the deductible percentage of the cost of food and beverages consumed while away from home by an individual during, or incident to, a period of duty subject to the hours of service limitations of the Department of Transportation.

[125] Individuals subject to the hours of service limitations of the Department of Transportation include:

(1) certain air transportation employees such as pilots, crew, dispatchers, mechanics, and control tower operators pursuant to Federal Aviation Administration regulations,

(2) interstate truck operators and interstate bus drivers pursuant to Department of Transportation regulations,

(3) certain railroad employees such as engineers, conductors, train crews, dispatchers and control operations personnel pursuant to Federal Railroad Administration regulations, and

(4) certain merchant mariners pursuant to Coast Guard regulations.

The increase in the deductible percentage is phased in according to the following schedule:

                                                  Deductible

 

Taxable years beginning in:                       percentage:

 

 

1998, 1999                                             55

 

2000, 2001                                             60

 

2002, 2003                                             65

 

2004, 2005                                             70

 

2006, 2007                                             75

 

2008 and thereafter                                    80

 

 

HOUSE BILL

[126] No provision. However, H.R. 3081, as passed by the House, accelerates the increase in the deduction for business meals while operating under Department of Transportation hours of service limitations so that it becomes 80 percent in 2001 and thereafter.

[127] Effective date . -- The provision is effective for taxable years beginning after 2000.

SENATE AMENDMENT

[128] No provision.

CONFERENCE AGREEMENT

[129] The conference agreement includes the provision in H.R. 3081.

G. REPEAL OF MODIFICATION OF INSTALLMENT METHOD (SEC. 206 OF THE BILL AND SECS. 453 AND 453A OF THE CODE)

PRESENT LAW

[130] The installment method of accounting allows a taxpayer to defer the recognition of income from the disposition of certain property until payment is received. Sales to customers in the ordinary course of business are not eligible for the installment method, except for sales of property that is used or produced in the trade or business of farming and sales of timeshares and residential lots if an election to pay interest under section 453(l)(2)(B) is made. Section 536(a) of the Ticket to Work and Work Incentives Improvement Act of 1999 prohibited the use of the installment method for a transaction that would otherwise be required to be reported using the accrual method of accounting, effective for dispositions occurring on or after December 17, 1999.

[131] A pledge rule provides that if an installment obligation is pledged as security for any indebtedness, the net proceeds 45 of such indebtedness are treated as a payment on the obligation, triggering the recognition of income. Actual payments received on the installment obligation subsequent to the receipt of the loan proceeds are not taken into account until such subsequent payments exceed the loan proceeds that were treated as payments. The pledge rule does not apply to sales of property used or produced in the trade or business of farming, to sales of timeshares and residential lots where the taxpayer elects to pay interest under section 453(l)(2)(B), or to dispositions where the sales price does not exceed $150,000. The Ticket to Work and Work Incentives Improvement Act of 1999 provided that the right to satisfy a loan with an installment obligation will be treated as a pledge of the installment obligation, effective for dispositions occurring on or after December 17, 1999.

HOUSE BILL

[132] No provision. However, H.R. 3081, as passed by the House, repeals the prohibition on the use of the installment method of accounting for dispositions of property that would otherwise be reported for Federal income tax purposes using the accrual method of accounting. Accordingly, any disposition of property that otherwise qualifies to be reported using the installment method of accounting may be reported using that method without regard to whether the disposition would otherwise be reported using the accrual method of accounting.

[133] The provision leaves unchanged the rule added by section 536(b) of the Ticket to Work and Work Incentives Improvement Act of 1999 that modified the installment method pledge rule.

[134] Effective date . -- The provision is effective for sales or other dispositions on or after December 17, 1999.

SENATE AMENDMENT

[135] No provision. However, H.R. 833, as passed by the Senate, contains the provisions enacted in the Ticket to Work and Work Incentives Improvement Act of 1999 prohibiting the use of the installment method for a transaction that would otherwise be required to be reported using the accrual method of accounting and expanding the pledge rule.

CONFERENCE AGREEMENT

[136] The conference agreement includes the provision in H.R. 3081.

H. COORDINATE FARMERS AND FISHERMAN INCOME AVERAGING AND THE ALTERNATIVE MINIMUM TAX (SEC. 207 OF THE BILL AND SECS. 55 AND 1301 OF THE CODE)

PRESENT LAW

[137] An individual taxpayer engaged in a farming business as defined by section 263A(e)(4) may elect to compute his or her current year tax liability by averaging, over the prior three-year period, all or portion of his or her taxable income from the trade or business of farming. The averaging election is not coordinated with the alternative minimum tax. Thus, some farmers may become subject to the alternative minimum tax solely as a result of the averaging election.

HOUSE BILL

[138] No provision. However, H.R. 3081, as passed by the House, extends to individuals engaged in the trade or business of fishing the same election to income average that is available to farmers. For this purpose, the trade or business of fishing is the conduct of commercial fishing as defined in section 3 of the Magnuson-Stevens Fishery Conservation and Management Act (16 U.S.C. 1802) and includes the trade or business of catching, taking, or harvesting fish that are intended to enter commerce through sale, barter or trade.

[139] The bill also coordinates farmers and fishermen income averaging with the alternative minimum tax. Under the bill, a farmer or fisherman will owe alternative minimum tax only to the extent he or she will owe alternative minimum tax had averaging not been elected. This result is achieved by excluding the impact of the election to average farm and fishing income from the calculation of both regular tax and tentative minimum tax, solely for the purpose of determining alternative minimum tax.

[140] Effective date . -- The provision is effective for taxable years beginning after December 31, 2000.

SENATE AMENDMENT

[141] No provision. However, the provision of H.R. 3081 is included in S. 3152.

CONFERENCE AGREEMENT

[142] The conference agreement follows H.R. 3081 and S. 3152.

I. REPEAL SPECIAL OCCUPATIONAL TAXES ON PRODUCERS AND MARKETERS OF ALCOHOLIC BEVERAGES (SEC. 208 OF THE BILL AND SECS. 5081, 5091, 5111, 5121, 5131, AND 5276 OF THE CODE)

PRESENT LAW

[143] Under present law, special occupational taxes are imposed on producers and others engaged in the marketing of distilled spirits, wine, and beer. These excise taxes are imposed as part of a broader Federal tax and regulatory engine governing the production and marketing of alcoholic beverages. The special occupational taxes are payable annually, on July 1 of each year. The present tax rates are as follows:

[144] Producers: Distilled spirits and wines (sec. 5081) -- $1,000 per year, per premise; Brewers (sec. 5091) -- $1,000 per year, per premise.

[145] Wholesale dealers (sec. 5111): Liquors, wines, or beer -- $500 per year.

[146] Retail dealers (sec. 5121): Liquors, wines, or beer -- $250 per year.

[147] Nonbeverage use of distilled spirits (sec. 5131) -- $500 per year.

[148] Industrial use of distilled spirits (sec. 5276) -- $250 per year.

HOUSE BILL

[149] No provision, but H.R., 3081, as passed by the House repeals the special occupational taxes on producers and marketers of alcoholic beverages. The provision is effective on July 1, 2001. The provision does not affect liability for taxes imposed with respect to periods before July 1, 2001.

SENATE AMENDMENT

[150] No provision.

CONFERENCE AGREEMENT

[151] The conference agreement includes the provision of H.R. 3081, as passed by the House.

J. EXCLUSION FROM GROSS INCOME FOR CERTAIN FORGIVEN MORTGAGE OBLIGATIONS (SEC. 209 OF THE BILL AND SEC. 108 OF THE CODE)

PRESENT LAW

[152] Gross income includes all income from whatever source derived, including income from the discharge of indebtedness. However, gross income does not include discharge of indebtedness income if: (1) the discharge occurs in a Title 11 case; (2) the discharge occurs when the taxpayer is insolvent; (3) the indebtedness discharged is qualified farm indebtedness; or (4) except in the case of a C corporation, the indebtedness discharged is qualified real property business indebtedness. No exclusion is provided under present law for qualified residential indebtedness.

HOUSE BILL

[153] No provision. However, H.R. 3081, as passed by the House, permits eligible individuals to elect an exclusion from discharge of indebtedness income to the extent such income is attributable to the sale of real property securing qualified residential indebtedness. Qualified residential indebtedness is defined as indebtedness incurred or assumed by the taxpayer for the acquisition, construction, reconstruction, or substantial improvement of the taxpayer's principal residence (within the meaning of section 121) and which is secured by such residence. For this purpose, refinanced indebtedness qualifies for the exclusion only to the extent that the principal amount of the refinanced indebtedness does not exceed the principal amount of the indebtedness before the refinancing. The exclusion does not apply to qualified farm indebtedness or qualified real property business indebtedness.

[154] Effective date . -- The provision is effective for discharges of indebtedness after December 31, 2000.

SENATE AMENDMENT

[155] No provision. However, the provision of H.R. 3081 is included in S. 3152.

CONFERENCE AGREEMENT

[156] The conference agreement follows H.R. 3081 and S. 3152.

K. CLARIFICATION OF CASH ACCOUNTING RULES FOR SMALL BUSINESSES (SEC. 210 OF THE BILL AND SEC. 446 OF THE CODE)

PRESENT LAW

[157] Section 446(c) of the Code generally allows a taxpayer to select the method of accounting it will use to compute its taxable income if such method clearly reflects the income of the taxpayer. A taxpayer is entitled to adopt any one of the permissible methods for each separate trade or business, subject to certain restrictions. The regulations under section 446 require that a taxpayer use an accrual method of accounting with regard to purchases and sales of merchandise whenever section 471 requires the taxpayer to account for such items as inventory. 46 In general, section 471 provides that whenever, in the opinion of the Secretary of the Treasury, the use of inventories is necessary to clearly determine the income of the taxpayer, inventories must be taken by the taxpayer. Treas. Reg. sec. 1.4711 requires a taxpayer to account for inventories when the production, purchase, or sale of merchandise is an income-producing factor in the taxpayer's business. Treas. Reg. sec. 1.162 3 requires taxpayers carrying materials and supplies (other than incidental materials and supplies) on hand to deduct the cost of materials and supplies only in the amount that they are actually consumed and used in operations during the tax year.

HOUSE BILL

[158] No provision.

SENATE AMENDMENT

[159] No provision.

CONFERENCE AGREEMENT

[160] The conference agreement provides that, notwithstanding any other provision of the Code, a taxpayer is not required to use an accrual method of accounting if the average annual gross receipts of the taxpayer (or any predecessor) do not exceed $2.5 million for all prior taxable years beginning after October 31, 1999 (including the prior taxable years of any predecessor). Thus, even if the production, purchase, or sale of merchandise is an income-producing factor in the taxpayer's business, the taxpayer is not required to use an accrual method of accounting with regard to such purchases and sales if the average annual gross receipts of the taxpayer do not exceed $2.5 million.

[161] The provision also provides that a taxpayer meeting the average annual gross receipts test is not required to account for inventories under section 471. If a taxpayer elects not to account for inventory under section 471, the taxpayer is required to treat such inventory in the same manner as a material or supply that is not incidental. It is the intention of the conferees that a taxpayer that elects to treat inventory as a material or supply is to include in expense the charges for materials and supplies only in the amount that they are actually consumed and used in operation during the taxable year for which the return is made, provided that the costs of such materials and supplies have not been deducted in determining the net income or loss or taxable income for any previous year. 47

[162] Average annual gross receipts are determined by averaging the gross receipts of the three taxable year period ending with such prior taxable year.

[163] For example, assume a calendar year entity had gross receipts of $1.5 million in 1998, $2.5 million in 1999, $3.5 million in 2000, and $4.5 million in 2001. In addition, the sale of inventory is an income-producing factor in the taxpayer's business. Average annual gross receipts are $2.5 million in 2000 and $3.5 million in 2001. In calendar year 2001, the entity may use the cash method of accounting notwithstanding that the production, purchase, or sale of merchandise is an income-producing factor in the taxpayer's trade or business, because it had average annual gross receipts of $2.5 million or less for all prior taxable years. In calendar year 2002, the entity may not use the cash method of accounting with regard to purchases and sales of merchandise, because average annual gross receipts for a prior taxable year (2001) exceed $2.5 million.

[164] In addition, the rules of paragraph (2) and (3) section 448(c) (regarding the aggregation of related taxpayers, taxpayers not in existence for the entire three year period, short taxable years, definition of gross receipts, and treatment of predecessors) shall apply for purposes of determining the average annual gross receipts test.

[165] Effective date . -- The provision is effective for taxable years beginning after date of enactment. Any change in the taxpayer's method of accounting permitted as a result of the provision is treated as a voluntary change initiated by the taxpayer with the consent of the Secretary of the Treasury. Any required section 481(a) adjustment is to be taken into account over a period not to exceed four years under principles consistent with those in Rev. Proc. 99 49. 48

L. AUTHORIZE PAYMENT OF INTEREST ON BUSINESS CHECKING ACCOUNTS (SEC. 211 OF THE BILL)

[166] The bill would eliminate the Federal prohibition on depository institutions paying interest on demand deposits. Thus, under the bill, depository institutions would be permitted to pay interest on business checking accounts.

[167] Effective date . -- The repeal of the prohibition on the payment of interest would be effective two years after the date of enactment. During the two year period beginning on the date of enactment, the bill would permit depository institutions to offer business customers checking accounts that allow the funds in the account to be swept into an interest-bearing account on a daily basis.

DOCUMENT ATTRIBUTES
  • Authors
    Armey, Rep. Richard K.
  • Institutional Authors
    House of Representatives
  • Cross-Reference
    For text of H.R. 5542's provisions, see Doc 2000-27538 (286 original

    pages), 2000 TNT 209-8 Database 'Tax Notes Today 2000', View '(Number' and 2000 TNT 209-9 Database 'Tax Notes Today 2000', View '(Number'; or H&D, Special

    Supplement, Oct. 27, 2000.

    For related coverage, see Doc 2000-27773 (7 original pages), 2000 TNT

    209-1 Database 'Tax Notes Today 2000', View '(Number', or H&D, Oct. 27, 2000, p. 1059.
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    budget, federal
    legislation, tax
    corporate tax
    credits
    work opportunity credit
    depreciation, expensing election
    business expense deduction, limits, meals, and entertainment
    accounting methods, cash, limits
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2000-28631 (474 original pages)
  • Tax Analysts Electronic Citation
    2000 TNT 221-27
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