A bill to amend the Internal Revenue Code of 1986 to allow use of cash accounting method for certain small businesses.

Summary: Cash Accounting for Small Business Act of 2001 - Amends the Internal Revenue Code to prohibit an eligible taxpayer from being required to use an accrual method of accounting for a taxable year if the such taxpayer's average annual gross receipts for the preceding three-year period does not exceed $5 million (to be adjusted for inflation).States that eligible small business taxpayers shall not be required to use inventories, and that property shall be treated as a material which is not incidental.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Cash Accounting for Small Business 
Act of 2001''.

SEC. 2. CLARIFICATION OF CASH ACCOUNTING RULES FOR SMALL BUSINESS.

    (a) Cash Accounting Permitted.--Section 446 of the Internal Revenue 
Code of 1986 (relating to general rule for methods of accounting) is 
amended by adding at the end the following new subsection:
    ``(g) Small Business Taxpayers Permitted to Use Cash Accounting 
Method Without Limitation.--
            ``(1) In general.--Notwithstanding any other provision of 
        this title, an eligible taxpayer shall not be required to use 
        an accrual method of accounting for any taxable year.
            ``(2) Eligible taxpayer.--For purposes of this subsection--
                    ``(A) In general.--A taxpayer is an eligible 
                taxpayer with respect to any taxable year if--
                            ``(i) for all prior taxable years beginning 
                        after December 31, 1999, the taxpayer (or any 
                        predecessor) met the gross receipts test of 
                        subparagraph (B), and
                            ``(ii) the taxpayer is not a tax shelter 
                        (as defined in section 448(d)(3)).
                    ``(B) Gross receipts test.--A taxpayer meets the 
                gross receipts test of this subparagraph for any prior 
                taxable year if the average annual gross receipts of 
                the taxpayer (or any predecessor) for the 3-taxable-
                year period ending with such prior taxable year does 
                not exceed $5,000,000. The rules of paragraphs (2) and 
                (3) of section 448(c) shall apply for purposes of the 
                preceding sentence.
                    ``(C) Inflation adjustment.--In the case of any 
                taxable year beginning in a calendar year after 2001, 
                the dollar amount contained in subparagraph (B) shall 
                be increased by an amount equal to--
                            ``(i) such dollar amount, multiplied by
                            ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for the 
                        calendar year in which the taxable year begins, 
                        by substituting ``calendar year 2000'' for 
                        ``calendar year 1992'' in subparagraph (B) 
                        thereof.
                If any amount as adjusted under this subparagraph is 
                not a multiple of $100,000, such amount shall be 
                rounded to the nearest multiple of $100,000.''.
    (b) Clarification of Inventory Rules for Small Business.--Section 
471 of the Internal Revenue Code of 1986 (relating to general rule for 
inventories) is amended by redesignating subsection (c) as subsection 
(d) and by inserting after subsection (b) the following new subsection:
    ``(c) Small Business Taxpayers Not Required to Use Inventories.--
            ``(1) In general.--An eligible taxpayer shall not be 
        required to use inventories under this section for a taxable 
        year.
            ``(2) Treatment of taxpayers not using inventories.--If an 
        eligible taxpayer does not use inventories with respect to any 
        property for any taxable year beginning after December 31, 
        2000, such property shall be treated as a material or supply 
        which is not incidental.
            ``(3) Eligible taxpayer.--For purposes of this subsection, 
        the term `eligible taxpayer' has the meaning given such term by 
        section 446(g)(2).''.
    (c) Indexing of Gross Receipts Test.--Section 448(c) of the 
Internal Revenue Code of 1986 (relating to $5,000,000 gross receipts 
test) is amended by adding at the end the following new paragraph:
            ``(4) Inflation adjustment.--In the case of any taxable 
        year beginning in a calendar year after 2001, the dollar amount 
        contained in paragraph (1) shall be increased by an amount 
        equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in which 
                the taxable year begins, by substituting `calendar year 
                2000' for `calendar year 1992' in subparagraph (B) 
                thereof.
        If any amount as adjusted under this paragraph is not a 
        multiple of $100,000, such amount shall be rounded to the 
        nearest multiple of $100,000.''.
    (d) Effective Date and Special Rules.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after December 31, 2000.
            (2) Change in method of accounting.--In the case of any 
        taxpayer changing the taxpayer's method of accounting for any 
        taxable year under the amendments made by this section--
                    (A) such change shall be treated as initiated by 
                the taxpayer;
                    (B) such change shall be treated as made with the 
                consent of the Secretary of the Treasury; and
                    (C) the net amount of the adjustments required to 
                be taken into account by the taxpayer under section 481 
                of the Internal Revenue Code of 1986 shall be taken 
                into account over a period (not greater than 4 taxable 
                years) beginning with such taxable year.