I.R.C. § 471(a) General Rule
Whenever in the opinion of the Secretary the use of inventories is necessary in
order clearly to determine the income of any taxpayer, inventories shall be taken
by such taxpayer on such basis as the Secretary may prescribe as conforming as nearly
as may be to the best accounting practice in the trade or business and as most clearly
reflecting the income.
I.R.C. § 471(b) Estimates Of Inventory Shrinkage Permitted
A method of determining inventories shall not be treated as failing to clearly reflect
income solely because it utilizes estimates of inventory shrinkage that are confirmed
by a physical count only after the last day of the taxable year if—
I.R.C. § 471(b)(1)
the taxpayer normally does a physical count of inventories at each location on a
regular and consistent basis, and
I.R.C. § 471(b)(2)
the taxpayer makes proper adjustments to such inventories and to its estimating
methods to the extent such estimates are greater than or less than the actual shrinkage.
I.R.C. § 471(c) Exemption For Certain Small Businesses
I.R.C. § 471(c)(1) In General
In the case of any taxpayer (other than a tax shelter prohibited from using the cash
receipts and disbursements method of accounting under section 448(a)(3)
which meets the gross receipts test of section 448(c)
for any taxable year—
I.R.C. § 471(c)(1)(A)
subsection (a) shall not apply with respect to such taxpayer for such taxable year,
I.R.C. § 471(c)(1)(B)
the taxpayer's method of accounting for inventory for such taxable year shall not
be treated as failing to clearly reflect income if such method either—
I.R.C. § 471(c)(1)(B)(ii)
conforms to such taxpayer's method of accounting reflected in an applicable financial
statement of the taxpayer with respect to such taxable year or, if the taxpayer does
not have any applicable financial statement with respect to such taxable year, the
books and records of the taxpayer prepared in accordance with the taxpayer's accounting
I.R.C. § 471(c)(2) Applicable Financial Statement
For purposes of this subsection, the term “applicable
financial statement” has the meaning given the term in section 451(b)(3)
I.R.C. § 471(c)(3) Application Of Gross Receipts Test To Individuals, Etc.
In the case of any taxpayer which is not a corporation or a partnership, the gross
receipts test of section 448(c)
shall be applied in the same manner as if each trade or business of such taxpayer
were a corporation or partnership.
I.R.C. § 471(c)(4) Coordination With Section 481
Any change in method of accounting made pursuant to this subsection shall be treated
for purposes of section 481
as initiated by the taxpayer and made with the consent of the Secretary.
I.R.C. § 471(d) Cross Reference
For rules relating to capitalization of direct and indirect costs of property, see
(Aug. 16, 1954, ch. 736, 68A Stat. 159; Oct. 4, 1976,
Pub. L. 94-455, title XIX, 1906(b)(13)(A), 90 Stat. 1834; Oct. 22, 1986, Pub. L. 99-514, title VIII, 803(b)(4), 100 Stat. 2356; Pub. L. 105-34, title IX, Sec. 961(a), Aug. 5, 1997, 111 Stat 788; Pub. L. 115-97, title I, Sec. 13102(c), Dec. 22, 2017, 131 Stat. 2054.)
1986--Pub. L. 99-514, title VIII, 802(b), Oct. 22, 1986, 100 Stat. 2350, substituted “Simplified dollar-value LIFO method for certain small businesses”
for “Election by certain small businesses to use one inventory pool” in
1981--Pub. L. 97-34, title II, 237(b), Aug. 13, 1981, 95 Stat. 253, added item 474.
1980--Pub. L. 96-223, title IV, 403(a)(2), Apr. 2, 1980, 94 Stat. 304, added item 473.
(c), (d). Pub. L. 115-97, Sec. 13102(c), redesignated subsec. (c) as subsec. (d) and added new subsec.
1997--Subsec. (b), (c). Pub. L. 105-34, Sec. 961(a), redesignated subsec. (b) as subsec. (c) and added a new subsec. (b).
1986--Pub. L. 99-514 designated existing provisions as subsec. (a)
and added subsec. (b).
1976--Pub. L. 94-455 struck out “or his delegate” after “Secretary"
EFFECTIVE DATE OF 2017 AMENDMENTS
Amendment by Sec. 13102(c) of Pub. L. 115-97, effective for taxable years beginning after December 31, 2017.
EFFECTIVE DATE OF 1997 AMENDMENTS
Amendment by Section 961(a) of Pub. L. 105-34 applicable to taxable years ending after the date of the enactment of this Act [Aug.
5, 1997]. Sec. 961(b)(2) provided the following rule:
“(2) Coordination with section 481.--In the case of any taxpayer permitted by
this section to change its method of accounting to a permissible method for any taxable
(A) such changes shall be treated as initiated by the taxpayer,
(B) such changes shall be treated as made with the consent of the Secretary of the
(C) the period for taking into account the adjustments under section 481 by reason
of such change shall be 4 years.”
EFFECTIVE DATE OF 1986 AMENDMENT
Amendment by Pub. L. 99-514 applicable to costs incurred after Dec. 31, 1986, in taxable years ending after such
date, except as otherwise provided, see section 803(d) of Pub. L. 99-514, set out as an Effective Date note under section 263A of this title.
STUDY OF ACCOUNTING METHODS FOR INVENTORY REPORT NOT LATER THAN DECEMBER 31, 1982
Pub. L. 97-34, title II, 238, Aug. 13, 1981, 95 Stat. 254, which directed the Secretary of the Treasury to conduct a study of methods of tax
accounting for inventory with a view towards development of simplified methods and
to report to Congress, not later than Dec. 31, 1982, was repealed by Pub. L. 100-647, title VI, 6252(a)(2), Nov. 10, 1988, 102 Stat. 3752.