SECTION 1. CLARIFICATION OF CASH ACCOUNTING RULES FOR SMALL BUSINESS.

    (a) Cash Accounting Permitted.--
            (1) In general.--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) Certain Small Business Taxpayers Permitted to Use Cash 
Accounting Method Without Limitation.--
            ``(1) In general.--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 taxpayer is an eligible taxpayer with respect to any taxable 
        year if--
                    ``(A) for all prior taxable years beginning after 
                December 31, 2006, the taxpayer (or any predecessor) 
                met the gross receipts test of section 448(c), and
                    ``(B) the taxpayer is not subject to section 447 or 
                448.''.
            (2) Expansion of gross receipts test.--
                    (A) In general.--Paragraph (3) of section 448(b) of 
                such Code (relating to entities with gross receipts of 
                not more than $5,000,000) is amended by striking 
                ``$5,000,000'' in the text and in the heading and 
                inserting ``$10,000,000''.
                    (B) Conforming amendments.--Section 448(c) of such 
                Code is amended--
                            (i) by striking ``$5,000,000'' each place 
                        it appears in the text and in the heading of 
                        paragraph (1) and inserting ``$10,000,000'', 
                        and
                            (ii) 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 2007, the dollar amount 
        contained in subsection (b)(3) and paragraph (1) of this 
        subsection 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 
                2006' 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.--
            (1) In general.--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.--A qualified taxpayer shall not be 
        required to use inventories under this section for a taxable 
        year.
            ``(2) Treatment of taxpayers not using inventories.--If a 
        qualified taxpayer does not use inventories with respect to any 
        property for any taxable year beginning after December 31, 
        2006, such property shall be treated as a material or supply 
        which is not incidental.
            ``(3) Qualified taxpayer.--For purposes of this subsection, 
        the term `qualified taxpayer' means--
                    ``(A) any eligible taxpayer (as defined in section 
                446(g)(2)), and
                    ``(B) any taxpayer described in section 
                448(b)(3).''.
            (2) Conforming amendments.--
                    (A) Subpart D of part II of subchapter E of chapter 
                1 of such Code is amended by striking section 474.
                    (B) The table of sections for subpart D of part II 
                of subchapter E of chapter 1 of such Code is amended by 
                striking the item relating to section 474.
    (c) Effective Date and Special Rules.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after December 31, 2006.
            (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.
Output: Amends the Internal Revenue Code to exempt certain small business taxpayers from the requirements of using the accrual method of accounting and of using inventories. Allows such taxpayers to use a cash method of accounting if they meet the gross receipts test and are not engaged in farming as a corporation. Increases the amount of the gross receipts test to $10 million (currently, $5 million) and permits an annual inflation adjustment of that amount.