2000 Changes

Cash Method of Accounting Allowed for Qualifying Taxpayers

An accounting method is a set of rules for determining how and when to report income and expenses. The most commonly used methods are the cash method and an accrual method. Generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use the accrual method for purchases and sales of merchandise.

For tax years ending on or after December 17, 1999, the IRS has simplified the bookkeeping requirements for qualifying taxpayers. If you are a qualifying taxpayer, you can now choose, even if you produce, purchase, or sell merchandise in your business, to:

• Use the cash method of accounting, and
• Not keep an inventory.

Qualifying taxpayers. You are a qualifying taxpayer only if you meet the gross receipts test for each tax year ending after December 16, 1998. To qualify, your average gross receipts for the 3-tax-year period ending with each test year must be $1 million or less. For example, you must test 1998 and 1999 to see if you qualify to use the cash method and not keep an inventory for 2000. You qualify if your average gross receipts for 1996, 1997, and 1998 are $1 million or less (1998 test) and your average gross receipts for 1997, 1998, and 1999 are $1 million or less (1999 test). A tax shelter cannot be a qualifying taxpayer.

If you did not own your business for all of the 3-tax-year period, include the period of any predecessor. If your business has not been in existence for 3 tax years, base your average on the period it has existed.

Not keeping an inventory. If you choose to not keep an inventory, you will deduct the cost of the items you would otherwise include in inventory in the year you sell the item, or the year you pay for them, whichever is later. You deduct the cost of merchandise purchased for resale that you sold during the year. If you are a producer, you may use any reasonable method to estimate the raw material in your work in process and finished goods on hand at the end of the year to determine the raw material used to produce finished goods that were sold during the year.

Changing methods. If you qualify and want to change to the cash method, you must file Form 3115, Application for Change in Accounting Method. You must follow the provisions in Revenue Procedure 99-49 in Cumulative Bulletin 1999-2 for an automatic change in accounting method. Those provisions also apply if you no longer want to keep inventories. You may file one Form 3115 for both changes.

More information. For more information, see Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. For more information on accounting methods, see Publication 538, Accounting Periods and Methods.

Installment Method of Accounting Allowed for Qualifying Accrual Method Taxpayers

Before December 17, 1999, qualifying accrual method taxpayers could report sales or other dispositions of property on the installment method. For sales of certain property occurring after December 16, 1999, accrual method taxpayers were prohibited from using the installment method.

This prohibition has been repealed, retroactive to December 17, 1999. Qualifying accrual method taxpayers can use the installment method to report sales and other dispositions of property as if the prohibition had never been enacted.

Standard Mileage Rate

If you use your car for business, you can figure your deduction for business use based on either your actual costs or the standard mileage rate. For 2000, the standard mileage rate for the cost of operating your car, including a van, pickup, or panel truck, is increased to 32 1/2 cents a mile for all business miles.

Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Meal Reimbursements for Employees Subject to "Hours of Service" Limits

For 2000 and 2001, you can deduct 60% of the reimbursements for meals your employees consume while away from their tax home on business during, or incident to, any period subject to the Department of Transportation's "hours of service" limits. The percentage gradually increases to 80% by 2008. For more information, see chapter 13 in Publication 535, Business Expenses.

Corporate Contributions of Computer Technology and Equipment

A corporation (other than an S corporation) may take an increased deduction for donations of qualified contributions of computer technology or equipment to an eligible donee. The following changes apply to contributions made after 2000.

• Public libraries are added to the definition of an eligible donee.
• Qualified contributions may now be made up to 3 years (instead of 2 years) after the date the corporation acquired or substantially completed the construction of the donated property.
• A new rule applies to donations of computers reacquired by a manufacturer. See section 170(e)(6)(D) of the Internal Revenue Code.
• The provision for such contributions of computer technology and equipment is extended to tax years beginning before 2004.

Depreciation and Section 179 Deduction

Depreciation limits on business cars. The total section 179 deduction and depreciation you can take on a car (that is not a clean-fuel car) you use in your business and first place in service in 2000 cannot exceed $3,060. Your depreciation cannot exceed $4,900 for the second year, $2,950 for the third year, and $1,775 for each later year.

For information on the increased limits for clean-fuel cars, see chapter 4 in Publication 946, How To Depreciate Property.

Increased section 179 deduction. The total cost of section 179 property that you can elect to deduct is increased from $19,000 to $20,000 for 2000. For tax years after 2000, this amount will increase as shown below.

For more information on the section 179 deduction, see chapter 2 in Publication 946, How To Depreciate Property.

Like-Kind Exchanges Using Qualified Exchange Accommodation Arrangements (QEAAs)

The like-kind exchange rules generally do not apply to an exchange in which you acquire replacement property (new property) before you transfer relinquished property (property you give up). However, if you use a qualified exchange accommodation arrangement (QEAA), the exchange may qualify as a like-kind exchange. For more information, see chapter 1 in Publication 544, Sales and Other Dispositions of Assets.

Basis of Stock Affected By Assumption of Liabilities

If your exchange of property (or property and money) for stock is not taxable, the basis of the stock you receive is generally the adjusted basis of the property (plus the amount of money, if any) you transferred. Increase this amount by the amount of any gain you recognized on the exchange. Decrease this amount by any cash you received, the fair market value of other property you received, and any loss recognized on the exchange. Also decrease this amount by the amount of any liability the corporation assumed from you, unless payment of the liability gives rise to a deduction when paid. Further decreases may be required for the assumption of liabilities after October 18, 1999, if the basis of the stock would otherwise be higher than its fair market value on the date of the exchange and the corporation assuming the liability did not acquire in the exchange either substantially all of the assets or the trade or business with which the liability is associated.

The basis of any other property you receive in addition to the stock is its fair market value on the date of the exchange.

Self-Employment Tax

The self-employment tax rate on net earnings remains the same for calendar year 2000. This rate, 15.3%, is a total of 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

The maximum amount subject to the social security part for tax years beginning in 2000 has increased to $76,200. All net earnings of at least $400 are subject to the Medicare part.

Farm Income Averaging

You may be able to use a negative taxable income amount for a base year when figuring your tax on Schedule J (Form 1040), Farm Income Averaging. For details, see the 2000 instructions for Schedule J. For general information about farm income averaging, see Farm Income Averaging in chapter 4 of Publication 225, Farmer's Tax Guide.

Electronic Filing for Certain Partnerships

Partnerships with more than 100 partners are required to file partnership returns electronically for tax years ending on or after December 31, 2000. If your partnership return is not filed electronically, you may be subject to penalties for failure to file. However, you may be able to obtain a waiver due to hardship. See section 301.6011-3(b) of the regulations and Announcement 2000-101 in Internal Revenue Bulletin 2000-52.

Reporting Canceled Debt

Beginning January 1, 2000, an organization that lends money as a significant part of its trade or business must now report any canceled debt to the IRS. For example, this applies to finance companies and credit card companies (whether or not affiliated with financial institutions). For more information on reporting cancellation of debt, see the 2000 Instructions for Forms 1099-A and 1099-C.

New Form 8869 To Elect Qualified Subchapter S Subsidiary Treatment

Parent S corporations can use the new Form 8869, Qualified Subchapter S Subsidiary Election, to elect to treat one or more of their eligible subsidiaries as a qualified subchapter S subsidiary (QSub). The election results in a deemed liquidation of the subsidiary into the parent company. Following the deemed liquidation, the QSub is not treated as a separate corporation. All of the subsidiary's assets, liabilities, and items of income, deduction, and credit are treated as those of the parent. For more information, see the instructions for Form 8869.

OID List Now Available From IRS Website

The original issue discount (OID) list that appears at the end of Publication 1212 is no longer available on the electronic bulletin board. You can now download it with the rest of Publication 1212 from our website at www.irs.gov. Go to the Forms and Publications page and select Forms and Publications by Date or Forms and Publications by Number. Then select Publication 1212 from the list. Also, be sure to select file format, "SGML."

For information on original issue discount and the list of original issue discount instruments, see Publication 1212, List of Original Issue Discount Instruments.

Employment Tax Exclusion for Educational Assistance Program Benefits

The exclusion from wages for benefits you provide to an employee under an educational assistance program was scheduled to expire for expenses paid for courses beginning after May 31, 2000. It has been extended to include benefits for expenses paid for courses beginning before January 1, 2002. For more information about this exclusion, see chapter 2 in Publication 15-B, Employer's Tax Guide to Fringe Benefits.

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