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is an exception to the inventory accounting requirements for
taxpayers with average annual gross receipts of $1 million or
less. See Rev. Proc. 2001-10, sec. 1, 2001-1 C.B. 272, 272. The
exception is only available for taxpayers that are not required
to use the inventories or accrual method of accounting, and for
tax years ending after December 17, 1999.15 Id. secs. 1, 8,
2002-1 C.B. 272, 275.
If the exception is applicable, the taxpayer may choose to
treat inventory in the same manner as materials and supplies that
are not incidental pursuant to regulations promulgated under
section 162. See sec. 1.162-3, Income Tax Regs. Pursuant to
section 1.162-3, Income Tax Regs.:
Taxpayers carrying materials and supplies on hand
should include in expenses 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. * * *
For a taxpayer using the exception, the inventoriable items
that are treated as materials and supplies that are not
incidental are considered consumed and used in the year in which
the taxpayer sells the merchandise or finished goods. See Rev.
15The IRS will not challenge a taxpayer’s use of the cash
method under sec. 446, or a taxpayer’s failure to account for
inventories under sec. 471, in a tax year ending before Dec. 17,
1999, if the taxpayer would satisfy the 3-tax-year-period gross
receipts test of Rev. Proc. 2001-10, sec. 5.01, 2001-1 C.B. 272,
273. Id. sec 8., 2001-1 C.B. at 275.
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