Internal Revenue Bulletin 2020-34 (PDF rendition): IRS Notices

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Bulletin No. 2020–34
August 17, 2020
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
EMPLOYMENT TAX
REG-111879-20, page 421.
Temporary and proposed regulations provide guidance on
the recapture of excess employment tax credits. Under the
Families First Coronavirus Response Act and Coronavirus
Aid, Relief and Economic Security Act, eligible employers
may claim refundable paid sick and family leave and em-
ployee retention credits up to the total allowable amounts
either on their employment tax returns or as an advance
payment that is later reconciled on their employment tax
returns. Any refund of these credits paid to a taxpayer that
exceeds the credit amount the taxpayer is allowed is an er-
roneous refund. These temporary regulations authorize the
assessment and collection of any erroneous refund of the
credits in the normal course of processing the applicable
employment tax returns. This allows the IRS to efficiently
recover any refund, while preserving administrative protec-
tions for taxpayers.
T.D. 9904, page 413.
Temporary and proposed regulations provide guidance on
the recapture of excess employment tax credits. Under the
Families First Coronavirus Response Act and Coronavirus
Aid, Relief and Economic Security Act, eligible employers
may claim refundable paid sick and family leave and em-
ployee retention credits up to the total allowable amounts
either on their employment tax returns or as an advance
payment that is later reconciled on their employment tax
returns. Any refund of these credits paid to a taxpayer that
exceeds the credit amount the taxpayer is allowed is an er-
roneous refund. These temporary regulations authorize the
assessment and collection of any erroneous refund of the
credits in the normal course of processing the applicable
employment tax returns. This allows the IRS to efficiently
recover any refund, while preserving administrative protec-
tions for taxpayers.
EXCISE TAX
REG-112042-19, page 422.
This document contains proposed regulations relating to the
excise taxes imposed on certain amounts paid for transpor-
tation of persons and property by air. Specifically, the pro-
posed regulations relate to the exemption for amounts paid
for certain aircraft management services. The proposed
regulations also amend, revise, redesignate, and remove
provisions of existing regulations that are out-of-date or ob-
solete and generally update the existing regulations to in-
corporate statutory changes, case law, and other published
guidance. In addition, the proposed regulations withdraw a
provision that was included in a prior notice of proposed
rulemaking that was never finalized and re-propose it. The
proposed regulations affect persons that provide air trans-
portation of persons and property, and persons that pay for
those services.
INCOME TAX
Notice 2020-58, page 419.
In response to the ongoing Coronavirus Disease 2019
(COVID-19) pandemic, this notice provides temporary relief
from certain requirements under § 47 of the Internal Revenue
Code.
Finding Lists begin on page ii.

REG-132766-18, page 436.
This document contains proposed regulations to implement
legislative changes to sections 263A, 448, 460, and 471
of the Internal Revenue Code (Code) that simplify the appli-
cation of those tax accounting provisions for certain busi-
nesses having average annual gross receipts that do not
exceed $25 million, adjusted for inflation. This document
also contains proposed regulations regarding certain special
accounting rules for long-term contracts under section 460
to implement legislative changes applicable to corporate tax-
payers. The proposed regulations generally affect taxpayers
with average annual gross receipts of not more than $25
million (adjusted for inflation). Additionally, this document
contains a request for comments regarding the application
of section 460 (or other special methods of accounting) to
a contract with income that is accounted for in part under
section 460 (or other special method) and in part under sec-
tion 451.

The IRS Mission
Provide America’s taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-
force the law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing of-
ficial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of inter-
nal management are not published; however, statements of
internal practices and procedures that affect the rights and
duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service
on the application of the law to the pivotal facts stated in
the revenue ruling. In those based on positions taken in rul-
ings to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature are
deleted to prevent unwarranted invasions of privacy and to
comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
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procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B,
Legislation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative
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by the Department of the Treasury’s Office of the Assistant
Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
August 17, 2020 Bulletin No. 2020–34

Part I
26 CFR 31.3111-6T & 26 CFR 31.3221-5T: Recap-
ture of credits under the Families First Coronavirus
Response Act and the Coronavirus Aid, Relief, and
Economic S
T.D. 9904
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 31
Recapture of Excess
Employment Tax Credits
under the Families First Act
and the CARES Act
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document amends the
regulations under sections 3111 and 3221
of the Internal Revenue Code with the
addition of temporary regulations issued
under the regulatory authority granted by
the Families First Coronavirus Response
Act and the Coronavirus Aid, Relief, and
Economic Security Act to prescribe such
regulations as may be necessary for rec-
onciling advance payments of refundable
employment tax credits provided under
these acts and recapturing the benefit of
the credits when necessary. Consistent
with this authority, these temporary reg-
ulations authorize the assessment of any
erroneous refund of the credits paid under
sections 7001 and 7003 of the Families
First Coronavirus Response Act, includ-
ing any increases in such credits under
section 7005 thereof, and section 2301 of
the Coronavirus Aid, Relief, and Econom-
ic Security Act. The text of these tempo-
rary regulations also serves as the text of
the proposed regulations (REG-111879-
20) set forth in the notice of proposed
rulemaking on this subject in the Proposed
Rules section of this issue of the Federal
Register.
DATES: Effective Date: These temporary
regulations are effective on July 29, 2020.
Applicability Date: For date of applica-
bility, see §§31.3111-6T and 31.3221-5T
of these temporary regulations.
FOR FURTHER INFORMATION CON-
TACT: Concerning these temporary regu-
lations, NaLee Park at 202-317-6798.
SUPPLEMENTARY INFORMATION:
Background
I. The Statutes in General: The Families
First Act and the CARES Act
The Families First Coronavirus Re-
sponse Act (Families First Act), Public
Law 116-127, 134 Stat. 178 (2020), en-
acted on March 18, 2020, and the Corona-
virus Aid, Relief, and Economic Security
Act (CARES Act), Public Law 116-136,
134 Stat. 281 (2020), enacted on March
27, 2020, provide relief to taxpayers from
economic hardships resulting from the
Coronavirus Disease 2019 (COVID-19).
The Families First Act, through the
enactment of the Emergency Paid Sick
Leave Act and the Emergency Family
and Medical Leave Expansion Act, gen-
erally requires employers with fewer
than 500 employees to provide paid leave
due to certain circumstances related to
COVID-19.
Division E of the Families First Act,
the Emergency Paid Sick Leave Act
(EPSLA), requires certain employers to
provide employees with up to 80 hours of
paid sick leave if the employee is unable
to work or telework because the employ-
ee:
(1) is subject to a Federal, State, or local
quarantine or isolation order related
to COVID-19;
(2) has been advised by a health care pro-
vider to self-quarantine due to con-
cerns related to COVID-19;
(3) is experiencing symptoms of
COVID-19 and seeking a medical di-
agnosis;
(4) is caring for an individual who is
subject to a Federal, State, or local
quarantine or isolation order related
to COVID-19, or has been advised
by a health care provider to self-quar-
antine due to concerns related to
COVID-19;
(5) is caring for a son or daughter of such
employee if the school or place of
care of the son or daughter has been
closed, or the child care provider of
such son or daughter is unavailable,
due to COVID-19 precautions; or
(6) is experiencing any other substantial-
ly similar condition specified by the
Secretary of Health and Human Ser-
vices in consultation with the Secre-
taries of the Treasury and Labor.
1
An employee who is unable to work or
telework for reasons related to COVID-19
described in (1), (2), or (3) above is enti-
tled to paid sick leave at the employee’s
regular rate of pay or, if higher, the Federal
minimum wage or any applicable State or
local minimum wage, up to $511 per day
and $5,110 in the aggregate. An employ-
ee who is unable to work or telework for
reasons related to COVID-19 described in
(4), (5), or (6) above is entitled to paid sick
leave at two-thirds the employee’s regular
rate of pay or, if higher, the Federal mini-
mum wage or any applicable State or local
minimum wage, up to $200 per day and
$2,000 in the aggregate.
Division C of the Families First Act,
the Emergency Family and Medical Leave
Expansion Act (EFMLEA), amends the
Family and Medical Leave Act of 1993 to
require certain employers to provide ex-
panded paid family and medical leave to
employees who are unable to work or tele-
work for reasons related to COVID-19.
An employee can receive up to 10 weeks
of paid family and medical leave at two-
thirds the employee’s regular rate of pay,
up to $200 per day and $10,000 in the ag-
gregate if the employee is unable to work
or telework because the employee is car-
ing for a son or daughter whose school or
place of care is closed or whose child care
provider is unavailable for reasons related
to COVID-19.
1
The U.S. Department of Health and Human Services has not yet specified any other such conditions as of July 29, 2020.
Bulletin No. 2020–34 413 August 17, 2020

Sections 7001 and 7003 of the Families
First Act generally provide that employers
subject to the paid leave requirements un-
der EPSLA and EFMLEA (“eligible em-
ployers”) are entitled to fully refundable
tax credits to cover the cost of the leave
required to be paid for those periods of
time during which employees are unable
to work or telework for reasons related to
COVID-19.
2
Eligible employers are entitled to re-
ceive a refundable credit equal to the
amount of the qualified sick leave wages
and qualified family leave wages (col-
lectively “qualified leave wages”), plus
allocable qualified health plan expenses.
Under the respective provisions, qualified
leave wages are defined to mean wages
(as defined in section 3121(a) of the In-
ternal Revenue Code (Code)) and com-
pensation (as defined in section 3231(e)
of the Code) paid by an employer which
are required to be paid under the EPSLA
and EFMLEA. See section 7001(c) and
7003(c). The credit is allowed against the
taxes imposed on employers by section
3111(a) of the Code (the Old-Age, Survi-
vors, and Disability Insurance tax (social
security tax)), first reduced by any credits
claimed under sections 3111(e) and (f) of
the Code, and section 3221(a) of the Code
(the Railroad Retirement Tax Act Tier 1
tax), on all wages and compensation paid
to all employees. Under section 7005 of
the Families First Act, the qualified leave
wages are not subject to the taxes imposed
on employers by sections 3111(a) and
3221(a) of the Code. In addition, section
7005 provides that the credits under sec-
tions 7001 and 7003 of the Families First
Act are increased by the amount of the tax
imposed by section 3111(b) of the Code
(employer’s share of Medicare tax) on
qualified leave wages.
3
The CARES Act provides an addi-
tional credit for employers experiencing
economic hardship related to COVID-19.
Under section 2301 of the CARES Act,
certain employers who pay qualified wag-
es to their employees are eligible for an
employee retention credit. Employers
eligible for the employee retention cred-
it are employers that carry on a trade or
business during calendar year 2020 and
tax-exempt organizations that either have
a full or partial suspension of operations
during any calendar quarter in 2020 due to
an order from an appropriate governmen-
tal authority limiting commerce, travel,
or group meetings (for commercial, so-
cial, religious, or other purposes) due to
COVID-19, or experience a significant de-
cline in gross receipts during the calendar
quarter.
Qualified wages are wages (as defined
in section 3121(a) of the Code) and com-
pensation (as defined in section 3231(e)
of the Code) paid by an employer to some
or all employees after March 12, 2020,
and before January 1, 2021, and include
the employer’s qualified health plan ex-
penses that are properly allocable to such
wages or compensation. For employers
that averaged more than 100 full-time
employees during 2019, qualified wages
are wages and compensation (including
allocable qualified health plan expens-
es), up to $10,000 per employee, paid to
employees that are not providing services
because operations were fully or partially
suspended due to orders from an appro-
priate governmental authority or due to a
decline in gross receipts. For employers
who averaged 100 full-time employees
or fewer during 2019, qualified wages
are wages and compensation (including
allocable qualified health plan expenses),
up to $10,000 per employee, paid to any
employee during the period operations
were suspended due to orders from an ap-
propriate governmental authority or due to
a decline in gross receipts, regardless of
whether its employees are providing ser-
vices.
The employee retention credit is a fully
refundable tax credit for employers equal
to 50 percent of qualified wages. Be-
cause the maximum amount of qualified
wages taken into account with respect to
each employee is $10,000, the maximum
employee retention credit for an eligible
employer for qualified wages paid to any
employee is $5,000. The credit is allowed
against the taxes imposed on employers
by section 3111(a) of the Code, first re-
duced by any credits allowed under sec-
tions 3111(e) and (f) of the Code and sec-
tions 7001 and 7003 of the Families First
Act, and the taxes imposed under section
3221(a) of the Code that are attributable
to the rate in effect under section 3111(a)
of the Code, first reduced by any credits
allowed under sections 7001 and 7003 of
the Families First Act, on all wages and
compensation paid to all employees. The
same wages or compensation cannot be
counted for both the Families First Act
leave credits and the CARES Act employ-
ee retention credit.
II. Refundability of Credits
Sections 7001(b)(4) and 7003(b)(3)
of the Families First Act provide that if
the amount of the paid sick and family
leave credits under these sections exceeds
the taxes imposed by section 3111(a)
or 3221(a) of the Code for any calendar
quarter, such excess shall be treated as an
overpayment that shall be refunded un-
der sections 6402(a) and 6413(b) of the
Code. Section 2301(b)(3) of the CARES
Act provides that if the amount of the em-
ployee retention credit exceeds the taxes
imposed by section 3111(a) or 3221(a)
(limited to the portion attributable to the
rate in effect under section 3111(a)) of the
Code for any calendar quarter, such excess
shall be treated as an overpayment that
shall be refunded under sections 6402(a)
and 6413(b) of the Code.
Section 6402(a) of the Code provides
that, within the applicable period of lim-
itations, overpayments may be credited
against any liability in respect of an inter-
nal revenue tax on the part of the person
who made the overpayment and any re
-
maining balance refunded to such person.
Section 6413(b) provides that if more than
the correct amount of employment tax im-
posed by sections 3101, 3111, 3201, 3221,
or 3402 is paid or deducted and the over-
payment cannot be adjusted under section
2
Under sections 7001(d)(4) and 7003(d)(4) of the Families First Act, these credits do not apply to the government of the United States, the government of any State or political subdivision
thereof, or any agency or instrumentality of any of the foregoing.
3
The credit for the employer’s share of Medicare tax does not apply to eligible employers that are subject to Railroad Retirement Tax Act (RRTA) because under section 7005(a) of the
Families First Act qualified leave wages are not subject to Medicare tax under RRTA due to that section’s reference to section 3221(a) of the Code, which includes both social security tax
and Medicare tax.
August 17, 2020 414 Bulletin No. 2020–34

Bulletin No. 2020–34 415 August 17, 2020
6413(a)
4
, the amount of the overpayment
shall be refunded (subject to the applica-
ble statute of limitations) as the Secretary
may prescribe in regulations.
The IRS has revised Form 941, Em-
ployer’s Quarterly Federal Tax Return,
and is revising Form 943, Employer’s An-
nual Federal Tax Return for Agricultural
Employees, Form 944, Employer’s Annual
Federal Tax Return, and Form CT-1, Em-
ployer’s Annual Railroad Retirement Tax
Return, so that employers may use these
returns to claim the paid sick and family
leave credits under the Families First Act
and the employee retention credit under
the CARES Act. The revised employment
tax returns will provide for any credits in
excess of the taxes imposed under sec-
tions 3111(a) or 3221(a) (for the employ-
ee retention credit, only the taxes imposed
under section 3221(a) that are attributable
to the rate in effect under section 3111(a))
to be credited against other employment
taxes and then for any remaining balance
to be refunded to the employer (per sec-
tion 6402(a) or section 6413(b)).
5
III. Advance Payment of Credits and
Erroneous Refunds
Section 3606 of the CARES Act
amends sections 7001(b)(4) and 7003(b)
(3) of the Families First Act to provide
that, in anticipation of the paid sick and
family leave credits under these sections,
including any refundable portions (which
would include any increases in the cred-
its under section 7005), these credits may
be advanced, according to forms and in-
structions provided by the Secretary, up to
the total allowable amount and subject to
applicable limits for the calendar quarter.
Section 2301(l)(1) of the CARES Act pro-
vides that the Secretary shall issue such
forms, instructions, regulations, and guid-
ance as are necessary to allow the advance
payment of the employee retention credit
under section 2301, subject to the limita-
tions provided in section 2301 and based
on such information as the Secretary shall
require.
To implement the advance payment
provisions of the Families First Act and
the CARES Act, the IRS has created Form
7200, Advance Payment of Employer
Credits Due To COVID-19, which em-
ployers may use to request an advance of
the paid sick or family leave credits un-
der the Families First Act, the employee
retention credit under the CARES Act, or
two or more of them. Employers are re-
quired to reconcile any advance payments
claimed on Form 7200 with total credits
claimed and total taxes due on their em-
ployment tax returns. A refund, a credit, or
an advance of any portion of these credits
to a taxpayer in excess of the amount to
which the taxpayer is entitled is an erro-
neous refund for which the IRS must seek
repayment.
IV. Assessment Authority
Section 6201, in general, authoriz-
es the Secretary to determine and assess
tax liabilities including interest, addition-
al amounts, additions to the tax, and as-
sessable penalties. However, the general
authority to assess tax liabilities under
section 6201(a) does not allow the as-
sessment of any non-rebate
6
portion of an
erroneous refund of a refundable credit.
Instead, non-rebate refunds are generally
recovered or recaptured through voluntary
payment or litigation. The government
by appropriate action can bring civil liti-
gation to recover funds which its agents
have wrongfully, erroneously, or illegally
paid, and no statute is necessary to autho-
rize the government to sue in such a case,
since the right to sue is independent of
statute. United States v. Wurts, 303 U.S.
414, 415 (1938), citing United States v.
The Bank of the Metropolis, 40 U.S. 377
(1841). However, the statutory language
of the Families First Act and the CARES
Act provides for the administrative recap-
ture of these non-rebate refunds by autho-
rizing the promulgation of regulations or
other guidance to do so.
Sections 7001 and 7003 of the Families
First Act and section 2301 of the CARES
Act grant authority to the Department of
the Treasury (Treasury Department) and
the IRS to issue regulations or other guid-
ance to recapture an erroneous refund of
the credits. Specifically, sections 7001(f)
and 7003(f) of the Families First Act and
section 2301(l) of the CARES Act autho-
rize the Secretary to issue guidance to al-
low for the administrative reconciliation
and recapture of erroneous refunds. Sec-
tions 7001(f) and 7003(f) of the Families
First Act provide, in relevant part, that the
Secretary (or the Secretary’s delegate)
shall provide such regulations or other
guidance as may be necessary to carry
out the purposes of the credit, including
regulations or other guidance: (1) to pre-
vent the avoidance of the purposes of the
limitations under this provision; (2) to
minimize compliance and record-keeping
burdens associated with the credit; (3) to
provide for a waiver of penalties for fail-
ure to deposit amounts in anticipation
of the allowance of the credit; (4) to re-
capture the benefit of the credit in cases
where there is a subsequent adjustment to
the credit; and (5) to ensure that the wages
taken into account for the credit conform
with the paid sick leave and paid fami-
ly leave required to be provided under
the Families First Act. Similarly, section
2301(l) of the CARES Act provides in
relevant part that the Secretary shall issue
such forms, instructions, regulations, and
guidance as are necessary to provide for
the reconciliation of an advance payment
of the employee retention credit with the
amount advanced at the time of filing the
return of tax for the applicable calendar
quarter or taxable year, and to provide for
the recapture of the credit under section
2301 of the CARES Act if such credit is
allowed to a taxpayer that receives a small
business loan under section 1102 of the
CARES Act during a subsequent quarter.
4
Section 6413(a) addresses interest-free adjustments of overpayments. The section provides that if more than the correct amount of employment tax imposed by section 3101, 3111, 3201,
3221, or 3402 is paid with respect to any payment of remuneration, proper adjustments with respect to both the tax and the amount to be deducted, shall be made, without interest, in such
manner and at such times as the Secretary may by regulations prescribe.
5
Employment tax returns have also been revised to provide for reporting of any deferral of employment taxes under the CARES Act. Section 2302 of the CARES Act provides that employers
may defer the deposit and payment of the employer’s share of social security tax for the payroll tax deferral period of March 27, 2020 through December 31, 2020. The deferral applies in
addition to the credits claimed on an employment tax return, but the deferral does not reduce the amount of the employer’s share of social security tax against which the credits are applied.
6
”Non-rebate” refers to the portion of any refund of a credit that exceeds the IRS’s determination of the recipient’s tax liability (i.e., the remaining portion of the refund that is paid to the
recipient after the refund has been applied to the recipient’s tax liability).

August 17, 2020 416 Bulletin No. 2020–34
Accordingly, this document amends
the Employment Tax Regulations (26
CFR Part 31) by adding temporary regu-
lations under sections 3111 and 3221 of
the Code. Concurrent with the publication
of this Treasury decision, the Treasury
Department and the IRS are publishing in
the Proposed Rules section of this issue of
the Federal Register a notice of proposed
rulemaking (REG-111879-20) on this sub-
ject that cross-references the text of these
temporary regulations. See section 7805(e)
(1). Interested persons are directed to the
ADDRESSES and COMMENTS AND
REQUESTS FOR A PUBLIC HEARING
sections of the preamble to REG-111879-
20 for information on submitting public
comments or requesting a public hearing
on the proposed regulations.
Explanation of Provisions
Sections 7001 and 7003 of the Fam-
ilies First Act and section 2301 of the
CARES Act provide that the credits de-
scribed in these sections are taken against
the taxes imposed on employers under
sections 3111(a) or 3221(a) of the Code
(for the employee retention credit, only
the taxes imposed under section 3221(a)
that are attributable to the rate in effect
under section 3111(a) of the Code). Ad-
ditionally, if the amount of the credit ex-
ceeds the taxes imposed under sections
3111(a) or 3221(a) of the Code (for the
employee retention credit, only the taxes
imposed under section 3221(a) that are
attributable to the rate in effect under sec-
tion 3111(a) of the Code) for any calendar
quarter, such excess shall be treated as an
overpayment to be refunded or credited
under sections 6402(a) and 6413(b) of
the Code. Any credits claimed that ex-
ceed the amount to which the employer
is entitled and that are actually credited
or paid by the IRS are considered to be
erroneous refunds of the credits. These
temporary regulations provide that erro-
neous refunds of these credits are treated
as underpayments of the taxes imposed
under sections 3111(a) or 3221(a) of the
Code and authorize the IRS to assess any
portion of the credits erroneously cred-
ited, paid, or refunded in excess of the
amount allowed as if those amounts were
tax liabilities under sections 3111(a) and
3221(a) subject to assessment and ad-
ministrative collection procedures. This
allows the IRS to efficiently recover the
amounts, while also preserving adminis-
trative protections afforded to taxpayers
with respect to contesting their tax liabil-
ities under the Code and avoiding unnec-
essary costs and burdens associated with
litigation. These assessment and admin-
istrative collection procedures will apply
in the normal course in processing em-
ployment tax returns that report advances
in excess of claimed credits and in exam-
ining returns for excess claimed credits.
Specifically, these temporary regula-
tions provide that any amount of the cred-
its for qualified leave wages under sections
7001 and 7003 of the Families First Act,
plus any amount of credits for qualified
health plan expenses under sections 7001
and 7003, and including any increases in
these credits under section 7005, and any
amount of the employee retention credit
for qualified wages under section 2301
of the CARES Act that are erroneously
refunded or credited to an employer shall
be treated as underpayments of the tax-
es imposed by section 3111(a) or section
3221(a), as applicable, by the employer
and may be administratively assessed and
collected in the same manner as the taxes.
These temporary regulations provide that
the determination of any amount of cred-
its erroneously refunded must take into
account any credit amounts advanced to
an employer under the process established
by the IRS in accordance with sections
7001(b)(4)(A)(ii) and 7003(b)(3)(B) of
the Families First Act and section 2301(l)
(1) of the CARES Act.
Because in certain situations third par-
ty payors claim credits on behalf of their
common law employer clients, these
temporary regulations also provide that
employers against whom an erroneous re-
fund of credits can be assessed as an un-
derpayment include persons treated as the
employer under sections 3401(d), 3504,
and 3511 of the Code, consistent with
their liability for the section 3111(a) and
section 3221(a) taxes against which the
credit applied.
Finally, these temporary regulations
apply to all credit refunds under section
7001 and 7003 of the Families First Act
advanced or paid on or after April 1, 2020,
and all credit refunds under section 2301
of the CARES Act advanced or paid on or
after March 13, 2020. These applicabili-
ty dates correspond to the effective dates
of the statutory sections that provide for
these credits and that authorize guidance
to allow for the administrative reconcilia-
tion and recapture of erroneous refunds of
these credits.
Sections 7001(g) and 7003(g) of the
Families First Act provide that sections
7001 and 7003 apply to wages paid with
respect to the period beginning on a date
selected by the Secretary of the Treasury
which is during the 15-day period begin-
ning on the date of the enactment of the
Families First Act (March 18, 2020). In
Notice 2020-21, 2020-16 I.R.B. 660, the
IRS provided that the tax credits for quali-
fied sick leave wages and qualified family
leave wages under sections 7001 and 7003
of the Families First Act apply to wages
paid for the period beginning on April 1,
2020, and ending on December 31, 2020.
Section 2301(m) of the CARES Act pro-
vides that section 2301 applies to wages
paid on or after March 13, 2020, and be-
fore January 1, 2021.
Pursuant to section 7805(b)(2) of the
Code, these temporary regulations are
permitted to apply before the dates pro-
vided under section 7805(b)(1), including
the date on which these temporary regu-
lations are filed with the Federal Register,
because these temporary regulations are
being issued within 18 months of the date
of the enactment of the relevant statuto-
ry provisions under the Families First Act
and the CARES Act. Accordingly, these
temporary regulations apply to all cred-
its under sections 7001 and 7003 of the
Families First Act, as modified by section
3606 of the CARES Act, including any in-
creases in the credits under section 7005
of the Families First Act, refunded on or
after April 1, 2020, including advanced re-
funds, as well as all credits under section
2301 of the CARES Act that are refunded
on or after March 13, 2020, including ad-
vanced refunds.
Special Analyses
The Office of Management and Bud-
get’s Office of Information and Regulato-
ry Analysis has determined that these tem-
porary regulations are not significant and
not subject to review under section 6(b) of
Executive Order 12866.

Bulletin No. 2020–34 417 August 17, 2020
Pursuant to the Regulatory Flexibility
Act (5 U.S.C. chapter 6), the Secretary
certifies that these temporary regulations
will not have a significant economic im-
pact on a substantial number of small
entities because these temporary regula-
tions impose no compliance burden on
any business entities, including small en-
tities. Although these temporary regula-
tions will apply to all employers eligible
for the credits under the Families First
Act and the CARES Act, including small
businesses and tax-exempt organizations
with fewer than 500 employees, and will
therefore be likely to affect a substantial
number of small entities, the econom-
ic impact will not be significant. These
temporary regulations do not affect the
employer’s employment tax reporting or
the necessary information to substantiate
entitlement to the credits. Rather, these
temporary regulations merely imple-
ment the statutory authority granted un-
der sections 7001(f) and 7003(f) of the
Families First Act and section 2301(l) of
the CARES Act that authorize the IRS to
assess, reconcile, and recapture any por-
tion of the credits erroneously credited,
paid, or refunded in excess of the actual
amount allowed as if the amounts were
tax liabilities under sections 3111(a)
and 3221(a) subject to assessment and
administrative collection procedures.
Notwithstanding this certification, the
Treasury Department and the IRS invite
comments on any impact these temporary
regulations would have on small entities.
Pursuant to section 7805(f), these tem-
porary regulations have been submitted to
the Chief Counsel of the Office of Advo-
cacy of the Small Business Administration
for comment on its impact on small busi-
ness.
The Treasury Department and the
IRS have determined that good cause
exists under section 553(b)(B) of the
Administrative Procedure Act (APA)
(5 U.S.C. 551 et seq.). Section 553(b)
(B) provides that an agency is not re-
quired to publish a notice of proposed
rulemaking in the Federal Register
when the agency, for good cause, finds
that notice and public comment thereon
are impracticable, unnecessary, or con-
trary to the public interest. Employers
must file Form 941, Employer’s Quar-
terly Federal Tax Return, for the second
quarter of calendar year 2020 by July
31, 2020, as required by section 6071 of
the Code and Treas. Reg. § 31.6071(a)-
1. Employers use Form 941 to claim
qualified leave credits under the Fami-
lies First Act and the employee retention
credit under the CARES Act, as well as
to report any advance of these credits
they received during the quarter. In fil-
ing their second quarter 2020 Form 941,
some employers will report and receive,
or will have already received as an ad-
vance, refund amounts in excess of the
refund to which they are entitled. These
temporary regulations authorize the as-
sessment of any such erroneous refunds.
Without these temporary regulations, in
some instances the IRS may not be able
to avoid bringing costly and burdensome
litigation to recover such reported erro-
neous refunds. Further, comments are
being solicited in the cross-referenced
notice of proposed rulemaking that is
in this issue of the Federal Register, and
any comments will be considered before
final regulations are issued.
Statement of Availability of IRS
Documents
IRS notices and other guidance cited
in this preamble are published in the In-
ternal Revenue Bulletin (or Cumulative
Bulletin) and are available from the Su-
perintendent of Documents, U.S. Govern-
ment Publishing Office, Washington, DC
20402, or by visiting the IRS website at
http://www.irs.gov.
Drafting Information
The principal author of these tempo-
rary regulations is NaLee Park, Office of
the Associate Chief Counsel (Employee
Benefits, Exempt Organizations, and Em-
ployment Taxes). However, other person-
nel from the Treasury Department and the
IRS participated in the development of
these temporary regulations.
List of Subjects in 26 CFR 31
Employment taxes, Income taxes, Pen-
alties, Pensions, Railroad retirement, Re-
porting and recordkeeping requirements,
Social security, Unemployment compen-
sation.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 31 is amend-
ed as follows:
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME
TAX AT SOURCE
Paragraph 1. The authority citation for
part 31 is amended by adding entries for
§§31.3111-6T and 31.3221-5T in numeri-
cal order to read in part as follows:
Authority: 26 U.S.C. 7805.
Section 31.3111-6T also issued under
sec. 7001 and sec. 7003 of the Families
First Coronavirus Response Act of 2020
and sec. 2301 of the Coronavirus Aid, Re-
lief, and Economic Security Act of 2020.
* * * * *
Section 31.3221-5T also issued under
sec. 7001 and sec. 7003 of the Families
First Coronavirus Response Act of 2020
and sec. 2301 of the Coronavirus Aid, Re-
lief, and Economic Security Act of 2020.
* * * * *
Par. 2. Section 31.3111-6T is added to
read as follows:
§31.3111-6T Recapture of credits under
the Families First Coronavirus Response
Act and the Coronavirus Aid, Relief, and
Economic Security Act.
(a) Recapture of erroneously refunded
credits under the Families First Corona-
virus Response Act. Any amount of credits
for qualified sick leave wages or qualified
family leave wages under sections 7001
and 7003, respectively, of the Families
First Coronavirus Response Act (Families
First Act), Public Law 116-127, 134 Stat.
178 (2020), as modified by section 3606
of the Coronavirus Aid, Relief, and Eco-
nomic Security Act (CARES Act), Public
Law 116-136, 134 Stat. 281 (2020), plus
any amount of credits for qualified health
plan expenses under sections 7001 and
7003, and including any increases in those
credits under section 7005 of the Families
First Act, that are treated as overpayments
and refunded or credited to an employer
under section 6402(a) or section 6413(b)
of the Internal Revenue Code (Code) and
to which the employer is not entitled,
resulting in an erroneous refund to the

August 17, 2020 418 Bulletin No. 2020–34
employer, shall be treated as an under-
payment of the taxes imposed by section
3111(a) of the Code and may be assessed
and collected by the Secretary in the same
manner as the taxes.
(b) Recapture of erroneously refund-
ed credits under the Coronavirus Aid,
Relief, and Economic Security Act. Any
amount of credits for qualified wages
under section 2301 of the CARES Act
that is treated as an overpayment and re-
funded or credited to an employer under
section 6402(a) or section 6413(b) of the
Code and to which the employer is not
entitled, resulting in an erroneous refund
to the employer, shall be treated as an
underpayment of the taxes imposed by
section 3111(a) of the Code and may be
assessed and collected by the Secretary
in the same manner as the taxes.
(c) Advance credit amounts errone-
ously refunded. The determination of any
amount of credits erroneously refunded as
described in paragraphs (a) and (b) of this
section must take into account any amount
of credits advanced to an employer under
the process established by the Internal
Revenue Service in accordance with sec-
tions 7001(b)(4)(A)(ii) and 7003(b)(3)(B)
of the Families First Act, as modified by
section 3606 of the CARES Act, and sec-
tion 2301(l)(1) of the CARES Act.
(d) Third party payors. For purposes of
this section, employers against whom an
erroneous refund of the credits under sec-
tions 7001 and 7003 of the Families First
Act (including any increases in those cred-
its under section 7005 of the Families First
Act), as modified by section 3606 of the
CARES Act, and the credits under section
2301 of the CARES Act can be assessed
as an underpayment of the taxes imposed
by section 3111(a) include persons treated
as the employer under sections 3401(d),
3504, and 3511 of the Code, consistent
with their liability for the section 3111(a)
taxes against which the credit applied.
(e) Applicability date. This regulation
applies to all credit refunds under sections
7001 and 7003 of the Families First Act
(including any increases in those credits
under section 7005 of the Families First
Act), as modified by section 3606 of the
CARES Act, advanced or paid on or after
April 1, 2020, and all credit refunds under
section 2301 of the CARES Act advanced
or paid on or after March 13, 2020.
Par. 3. Section 31.3221-5T is added to
read as follows:
§31.3221-5T Recapture of credits under
the Families First Coronavirus Response
Act and the Coronavirus Aid, Relief, and
Economic Security Act.
(a) Recapture of erroneously refunded
credits under the Families First Corona-
virus Response Act. Any amount of credits
for qualified sick leave wages or qualified
family leave wages under sections 7001
and 7003, respectively, of the Families
First Coronavirus Response Act (Families
First Act), Public Law 116-127, 134 Stat.
178 (2020), as modified by section 3606
of the Coronavirus Aid, Relief, and Eco-
nomic Security Act (CARES Act), Public
Law 116-136, 134 Stat. 281 (2020), plus
any amount of credits for qualified health
plan expenses under sections 7001 and
7003, that are treated as overpayments and
refunded or credited to an employer un-
der section 6402(a) or section 6413(b) of
the Internal Revenue Code (Code) and to
which the employer is not entitled, result-
ing in an erroneous refund to the employ-
er, shall be treated as an underpayment of
the taxes imposed by section 3221(a) of
the Code and may be assessed and collect-
ed by the Secretary in the same manner as
the taxes.
(b) Recapture of erroneously refunded
credits under the Coronavirus Aid, Relief,
and Economic Security Act. Any amount
of credits for qualified wages under sec-
tion 2301 of the CARES Act that is treated
as an overpayment and refunded or credit-
ed to an employer under section 6402(a) or
section 6413(b) of the Code and to which
the employer is not entitled, resulting in
an erroneous refund to the employer, shall
be treated as an underpayment of the taxes
imposed by section 3221(a) of the Code
and may be assessed and collected by the
Secretary in the same manner as the taxes.
(c) Advance credit amounts errone-
ously refunded. The determination of any
amount of credits erroneously refunded as
described in paragraphs (a) and (b) of this
section must take into account any amount
of credits advanced to an employer under
the process established by the Internal
Revenue Service in accordance with sec-
tions 7001(b)(4)(A)(ii) and 7003(b)(3)(B)
of the Families First Act, as modified by
section 3606 of the CARES Act, and sec-
tion 2301(l)(1) of the CARES Act.
(d) Third party payors. For purposes
of this section, employers against whom
an erroneous refund of the credits under
sections 7001 and 7003 of the Families
First Act, as modified by section 3606
of the CARES Act, and the credits under
section 2301 of the CARES Act can be
assessed as an underpayment of the tax-
es imposed by section 3221(a) include
persons treated as the employer under
sections 3401(d), 3504, and 3511 of the
Code, consistent with their liability for
the section 3221(a) taxes against which
the credit applied.
(e) Applicability date. This regulation
applies to all credit refunds under sec-
tions 7001 and 7003 of the Families First
Act, as modified by section 3606 of the
CARES Act, advanced or paid on or after
April 1, 2020, and all credit refunds under
section 2301 of the CARES Act advanced
or paid on or after March 13, 2020.
Sunita Lough,
Deputy Commissioner for Services
and Enforcement.
Approved: July 14, 2020.
David J. Kautter,
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on July
24, 2020, 4:15 p.m., and published in the issue of the
Federal Register for July 29, 2020, 85 F.R. 45514)

Bulletin No. 2020–34 419 August 17, 2020
Part III
Notice 2020-58
I. PURPOSE
On March 13, 2020, the President of
the United States issued an emergency
declaration under the Robert T. Stafford
Disaster Relief and Emergency Assistance
Act in response to the ongoing Coronavi-
rus Disease 2019 (COVID-19) pandem-
ic. The emergency declaration instructed
the Secretary of the Treasury “to provide
relief from tax deadlines to Americans
who have been adversely affected by the
COVID-19 emergency, as appropriate,
pursuant to 26 U.S.C. 7508A(a).” Sec-
tion III of this notice describes the relief
provided pursuant to § 7508A(a) of the
Internal Revenue Code (Code) for certain
requirements of the rehabilitation credit
under § 47 of the Code.
II. BACKGROUND
Section 38(b)(1) of the Code provides
that the current year general business
credit includes the investment credit de-
termined under § 46 of the Code. The
investment credit under § 46 includes the
rehabilitation credit under § 47.
On December 22, 2017, former § 47
was amended by section 13402 of Public
Law No. 115-97, 131 Stat. 2054 (2017),
commonly referred to as the Tax Cuts and
Jobs Act (TCJA). Prior to the TCJA, for-
mer § 47(a) provided for the purposes of
§ 46 a two-tier credit for qualified reha-
bilitation expenditures (QREs) incurred
in connection with the rehabilitation of
a qualified rehabilitated building (QRB).
Former § 47(a)(2) allowed a 20-percent
credit for QREs with respect to a certified
historic structure, and former § 47(a)(1)
allowed a 10-percent credit for QREs with
respect to a QRB other than a certified his-
toric structure (for certain buildings first
placed in service before 1936 (pre-1936
buildings)). Under former § 47, both the
20-percent and 10-percent credits were
fully allowed in the taxable year the QRB
was placed in service.
Section 13402(a) of the TCJA repealed
the 10-percent credit for pre-1936 build-
ings and modified the rules for claiming
the 20-percent credit for certified historic
structures. Section 13402(b) of the TCJA
amended § 47(c), in part, by redesignating
former § 47(c)(1)(C) and (D) as § 47(c)
(1)(B) and (C). Section 13402(c)(1) of the
TCJA provides that the amendments made
by section 13402(a) and (b) are generally
applicable to QRE amounts paid or in-
curred after December 31, 2017, subject
to a statutory transition rule provided in
section 13402(c)(2) of the TCJA (TCJA
transition rule).
Section 47(a)(1) provides for the pur-
poses of § 46, for any taxable year during
the 5-year period beginning in the taxable
year in which a QRB is placed in service,
the rehabilitation credit for such year is an
amount equal to the ratable share for such
year.
Section 47(a)(2) defines the ratable
share for any taxable year during the
5-year period described in § 47(a)(1) as an
amount equal to 20 percent of the QREs
with respect to the QRB, as allocated rat-
ably to each year during the 5-year period.
Section 47(b) provides that QREs with
respect to any QRB are taken into account
for the taxable year in which the QRB is
placed in service.
Under § 47(c)(1)(A)(i), a QRB must
be a building that has been substantial-
ly rehabilitated. Under § 47(c)(1)(B)(i),
a building is treated as substantially re-
habilitated only if the QREs during the
24-month period selected by the taxpayer
ending with or within the taxable year ex-
ceed the greater of the taxpayer’s adjust-
ed basis in the building (and its structural
components) or $5,000. For certain reha-
bilitations expected to be completed in
phases set forth in architectural plans and
specifications completed before the reha-
bilitation begins as described in § 47(c)(1)
(B)(ii) (phased rehabilitation), the taxpay-
er selects a 60-month period rather than a
24-month period.
Section 1.48-12(b)(2)(i) of the Income
Tax Regulations defines “substantial reha-
bilitation test” and provides that a build-
ing is treated as having been substantial-
ly rehabilitated for a taxable year only if
the QREs incurred during any 24-month
period selected by the taxpayer ending
with or within the taxable year exceed the
greater of (A) the adjusted basis of the
building (and its structural components),
or (B) $5,000. Section 1.48-12(b)(2)(v)
describes special rules for phased rehabil-
itation and provides that § 1.48-12(b)(2)
(i) is applied by substituting “60-month
period” for “24-month period.”
The TCJA transition rule provides that
in the case of QREs (for either a certified
historic structure eligible for a 20-percent
credit or a pre-1936 building eligible for
a 10-percent credit prior to December 31,
2017), with respect to any building owned
or leased by the taxpayer at all times on
and after January 1, 2018, the 24-month
period selected by the taxpayer under
§ 47(c)(1)(B)(i), or the 60-month period
selected by the taxpayer under the rule for
phased rehabilitation under § 47(c)(1)(B)
(ii), is to begin no later than the end of the
180-day period beginning on December
22, 2017, and the amendments made by
section 13402 of the TCJA apply to such
QREs paid or incurred after the end of
the taxable year in which such 24-month
or 60-month period ends. For taxpayers
selecting a 24-month period, the require-
ment to begin the period within 180 days
from December 22, 2017, means that the
latest day that such a 24-month period
can end under the TCJA transition rule is
June 20, 2020. For taxpayers permitted to
select a 60-month period for phased reha-
bilitation, the requirement to begin the pe-
riod within 180 days from December 22,
2017, means that the latest day that such a
60-month period can end under the TCJA
transition rule is June 20, 2023.
Section 7508A provides the Secretary
of the Treasury or his delegate (Secretary)
with authority to postpone the time for
performing certain acts under the internal
revenue laws for a taxpayer determined by
the Secretary to be affected by a Federal-
ly declared disaster as defined in § 165(i)
(5)(A). Pursuant to § 7508A(a), a period
of up to one year may be disregarded in
determining whether the performance of
certain acts is timely under the internal
revenue laws.
On April 9, 2020, the Department of
the Treasury and the Internal Revenue
Service (IRS) issued Notice 2020-23,

August 17, 2020 420 Bulletin No. 2020–34
2020-18 I.R.B. 742, which pursuant to
§ 7508A provided certain relief to af-
fected taxpayers and postponed due
dates until July 15, 2020, with respect to
certain tax filings and payments, certain
time-sensitive government actions, and
all time-sensitive actions listed in Rev.
Proc. 2018-58, 2018-50 I.R.B. 990 (Dec.
10, 2018), that were due to be performed
on or after April 1, 2020, and before July
15, 2020. See Notice 2020-23 and Rev.
Proc. 2018-58. Among the relief granted,
Notice 2020-23 (referencing Rev. Proc.
2018-58) postponed until July 15, 2020,
the time to perform certain time-sen-
sitive actions for purposes of § 47 that
were due to be performed on or after
April 1, 2020, and before July 15, 2020,
including the time period for satisfying
the substantial rehabilitation test de-
scribed in former § 47(c)(1)(C) (redesig-
nated as § 47(c)(1)(B) by the TCJA) and
§ 1.48-12(b)(2).
III. GRANT OF RELIEF UNDER
SECTION 47 PURSUANT TO
SECTION 7508A
The Secretary has determined that per-
sons with deadlines under § 47 that are de-
scribed in sections III.A and B of this no-
tice are persons affected by the COVID-19
emergency for the purposes of the relief
provided under § 7508A(a) as described
in sections III.A and B of this notice.
A. MEASURING PERIOD
UNDER THE SUBSTANTIAL
REHABILITATION TEST
For purposes of §§ 47(c)(1)(B) and 1.48-
12(b)(2), if the 24- or 60-month measuring
period in which the requisite amount of
QREs have to be paid or incurred in order
to satisfy the substantial rehabilitation test
for a building originally ends on or after
April 1, 2020, and before March 31, 2021,
the last day of the 24- or 60-month measur-
ing period for a taxpayer to incur the req-
uisite QREs with respect to the building is
postponed to March 31, 2021. This means
that a taxpayer may have a measuring peri-
od that is longer than 24 or 60 months.
B. DEADLINE FOR TCJA
TRANSITION RULE
For purposes of taxpayers subject to
the TCJA transition rule, if the 24- or
60-month measuring period in which the
requisite amount of QREs have to be paid
or incurred in order to satisfy the sub-
stantial rehabilitation test for a building
originally ends on or after April 1, 2020,
and before March 31, 2021, the last day
of the 24- or 60-month measuring period
for a taxpayer to pay or incur the requi-
site QREs with respect to the building is
postponed to March 31, 2021. Thus, if
the requisite QREs described in the pre-
ceding sentence are paid or incurred by
March 31, 2021, the TCJA transition rule
allows the rules of former § 47 allowing
the 10-percent and 20-percent credits in a
single year to apply to QREs paid or in-
curred with respect to such building in the
taxable year in which the 24- or 60-month
measuring period (the last day of which
is postponed by this notice) ends. In ad-
dition, the amendments made by section
13402(a) and (b) of the TCJA, under
which only the 20-percent credit is al-
lowed over five years, apply to QREs paid
or incurred with respect to such building
in succeeding taxable years.
C. OTHER REQUIREMENTS
Except as expressly provided in this
notice, all other rules and requirements of
§ 47 continue to apply.
IV. EFFECT ON OTHER DOCUMENTS
Notice 2020-23 is amplified.
V. DRAFTING INFORMATION
The principal authors of this notice are
Barbara J. Campbell and Michael J. Tor-
ruella Costa, Office of the Associate Chief
Counsel (Passthroughs and Special Indus-
tries). For further information regarding
this notice, contact Barbara J. Campbell or
Michael J. Torruella Costa at (202) 317-
4137 (not a toll-free number).

Bulletin No. 2020–34 421 August 17, 2020
Part IV
Notice of Proposed
Rulemaking by Cross-
reference to Temporary
Regulations
Recapture of Excess
Employment Tax Credits
under the Families First Act
and the CARES Act
REG-111879-20
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of Proposed Rulemak-
ing by cross-reference to temporary reg-
ulations.
SUMMARY: In the Rules and Regula-
tions section of this issue of the Federal
Register, the IRS is issuing temporary
regulations pursuant to the regulatory au-
thority granted under the Families First
Coronavirus Response Act and the Coro-
navirus Aid, Relief, and Economic Secu-
rity Act to prescribe such regulations as
may be necessary for reconciling advance
payments of refundable employment tax
credits provided under these acts and re-
capturing the benefit of the credits when
necessary. These proposed regulations af-
fect businesses and tax-exempt organiza-
tions that claim certain credits under the
Families First Coronavirus Response Act
for qualifying sick and family leave wages
and that claim certain employee retention
credits under the Coronavirus Aid, Relief,
and Economic Security Act. The text of
those temporary regulations serves as the
text of these proposed regulations.
DATES: Written or electronic comments
and requests for a public hearing must be
received by September 28, 2020. Requests
for a public hearing must be submitted as
prescribed in the “Comments and Re-
quests for a Public Hearing” section.
ADDRESSES: Commenters are strongly
encouraged to submit public comments
electronically. Submit electronic submis-
sions via the Federal eRulemaking Portal
at www.regulations.gov (indicate IRS and
REG-111879-20) by following the online
instructions for submitting comments.
Once submitted to the Federal eRulemak-
ing Portal, comments cannot be edited or
withdrawn. The IRS expects to have lim-
ited personnel available to process public
comments that are submitted on paper
through the mail. Until further notice,
any comments submitted on paper will
be considered to the extent practicable.
The Department of the Treasury (Trea-
sury Department) and the IRS will pub-
lish for public availability any comment
submitted electronically, and to the extent
practicable on paper, to its public docket.
Send paper submissions to: CC:PA:LP-
D:PR (REG-111879-20), room 5203, In-
ternal Revenue Service, PO Box 7604,
Ben Franklin Station, Washington, D.C.
20044.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, NaLee Park at (202) 317-
6879; concerning submissions of com-
ments and/or requests for a public hearing,
Regina Johnson, (202) 317-5177 (not toll-
free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
Temporary regulations in the Rules
and Regulations section of this issue of
the Federal Register amend the Employ-
ment Taxes and Collection of Income at
the Source Regulations (26 CFR part 31)
relating to sections 3111 and 3221 of the
Internal Revenue Code (Code) pursuant to
the regulatory authority granted under the
Families First Coronavirus Response Act
(Families First Act) and the Coronavirus
Aid, Relief, and Economic Security Act
(CARES Act) to prescribe such regula-
tions as may be necessary for reconciling
advance payments of refundable employ-
ment tax credits provided under these acts
and recapturing the benefit of the credits
when necessary. Consistent with this au-
thority, these proposed regulations autho-
rize the assessment of erroneous refunds
of the credits paid under sections 7001 and
7003 of the Families First Act and section
2301 of the CARES Act. The text of those
temporary regulations also serves as the
text of these proposed regulations. The
preamble to the temporary regulations ex-
plains the amendments.
Special Analyses
The Office of Management and Bud-
get’s Office of Information and Regulato-
ry Analysis has determined that these reg-
ulations are not significant and not subject
to review under section 6(b) of Executive
Order 12866.
Pursuant to the Regulatory Flexibility
Act (5 U.S.C. chapter 6), the Secretary cer-
tifies that these proposed regulations will
not have a significant economic impact on
a substantial number of small entities be-
cause these proposed regulations impose
no compliance burden on any business en-
tities, including small entities. Although
these proposed regulations will apply to
all employers eligible for the credits un-
der the Families First Act and the CARES
Act, including small businesses and
tax-exempt organizations with fewer than
500 employees, and will therefore be like-
ly to affect a substantial number of small
entities, the economic impact will not be
significant. These proposed regulations
do not affect the employer’s employment
tax reporting or the necessary information
to substantiate entitlement to the credits.
Rather, these proposed regulations merely
implement the statutory authority granted
under sections 7001(f) and 7003(f) of the
Families First Act and section 2301(l) of
the CARES Act that authorize the Service
to assess, reconcile, and recapture any
portion of the credits erroneously paid or
refunded in excess of the actual amount
allowed as if such amounts were tax liabil-
ities under sections 3111(a) and 3221(a)
subject to assessment and administrative
collection procedures. Notwithstanding
this certification, the Treasury Depart-
ment and the IRS invite comments on any
impact these regulations would have on
small entities.

August 17, 2020 422 Bulletin No. 2020–34
Pursuant to section 7805(f), this notice
of proposed rulemaking has been submit-
ted to the Chief Counsel of the Office of
Advocacy of the Small Business Adminis-
tration for comment on its impact on small
business.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
timely submitted to the IRS as prescribed
in the preamble under the “ADDRESS-
ES” section. The Treasury Department
and the IRS request comments on all as-
pects of these proposed regulations. Any
electronic comments submitted, and to the
extent practicable any paper comments
submitted, will be made available at www.
regulations.gov or upon request.
A public hearing will be scheduled if
requested in writing by any person who
timely submits electronic or written com-
ments. Requests for a hearing are strongly
encouraged to be submitted electronically.
If a public hearing is scheduled, notice of
the date and time for the public hearing
will be published in the Federal Regis-
ter. Announcement 2020-4, 2020-17 IRB
1, provides that until further notice, pub-
lic hearings conducted by the IRS will be
held telephonically. Any telephonic hear-
ing will be made accessible to people with
disabilities.
Statement of Availability of IRS
Documents
IRS notices and other guidance cited
in this preamble are published in the In-
ternal Revenue Bulletin (or Cumulative
Bulletin) and are available from the Su-
perintendent of Documents, U.S. Govern-
ment Publishing Office, Washington, DC
20402, or by visiting the IRS website at
http://www.irs.gov.
Drafting Information
The principal author of these regula-
tions is NaLee Park, Office of the Asso-
ciate Chief Counsel (Employee Benefits,
Exempt Organizations, and Employment
Taxes). However, other personnel from
the Treasury Department and the IRS par-
ticipated in the development of these reg-
ulations.
List of Subjects in 26 CFR 31
Employment taxes, Income taxes, Pen-
alties, Pensions, Railroad retirement, Re-
porting and recordkeeping requirements,
Social security, Unemployment compen-
sation.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 31 is pro-
posed to be amended as follows:
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME
TAX AT SOURCE
Paragraph 1. The authority citation for
part 31 is amended by adding entries for
§§ 31.3111-6T and 31.3221-5T in numeri-
cal order to read in part as follows:
Authority: 26 U.S.C. 7805.
Section 31.3111-6T also issued under
sec. 7001 and sec. 7003 of the Families
First Coronavirus Response Act of 2020
and sec. 2301 of the Coronavirus Aid, Re-
lief, and Economic Security Act of 2020
* * * * *
Section 31.3221-5T also issued under
sec. 7001 and sec. 7003 of the Families
First Coronavirus Response Act of 2020
and sec. 2301 of the Coronavirus Aid, Re-
lief, and Economic Security Act of 2020
* * * * *
Par. 2. Section 31.3111-6 is added to
read as follows:
§31.3111-6 Recapture of credits under
the Families First Coronavirus Response
Act and the Coronavirus Aid, Relief, and
Economic Security Act
[The text of proposed §31.3111-6 is the
same as the text of §31.3111-6T published
elsewhere in this issue of the Federal
Register].
Par. 3. Section 31.3221-5 is added to
read as follows:
§31.3221-5 Recapture of credits under
the Families First Coronavirus Response
Act and the Coronavirus Aid, Relief, and
Economic Security Act
[The text of proposed §31.3221-5 is the
same as the text of §31.3221-5T published
elsewhere in this issue of the Federal
Register].
Sunita Lough,
Deputy Commissioner for Services
and Enforcement.
(Filed by the Office of the Federal Register on July
24, 2020, 4:15 p.m., and published in the issue of the
Federal Register for July 29, 2020, 85 F.R. 45551)
Notice of Proposed
Rulemaking and Partial
Withdrawal of Notice of
Proposed Rulemaking
Excise Taxes;
Transportation of Persons
by Air; Transportation of
Property by Air; Aircraft
Management Services
REG-112042-19
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and partial withdrawal of notice of pro-
posed rulemaking.
SUMMARY: This document contains
proposed regulations relating to the excise
taxes imposed on certain amounts paid for
transportation of persons and property by
air. Specifically, the proposed regulations
relate to the exemption for amounts paid
for certain aircraft management services.
The proposed regulations also amend, re-
vise, redesignate, and remove provisions
of existing regulations that are out-of-date
or obsolete and generally update the ex-
isting regulations to incorporate statutory
changes, case law, and other published
guidance. In addition, the proposed reg-
ulations withdraw a provision that was
included in a prior notice of proposed
rulemaking that was never finalized and
re-propose it. The proposed regulations
affect persons that provide air transporta-
tion of persons and property, and persons
that pay for those services.

Bulletin No. 2020–34 423 August 17, 2020
DATES: Written or electronic comments
and requests for a public hearing must
be received by September 29, 2020. Re-
quests for a public hearing must be sub-
mitted as prescribed in the “Comments
and Requests for a Public Hearing”
section.
ADDRESSES: Commenters are strongly
encouraged to submit public comments
electronically. Submit electronic sub-
missions via the Federal eRulemaking
Portal at www.regulations.gov (indicate
IRS and REG-112042-19) by follow-
ing the online instructions for submit-
ting comments. Once submitted to the
Federal eRulemaking Portal, comments
cannot be edited or withdrawn. The IRS
expects to have limited personnel avail-
able to process public comments that are
submitted on paper through mail. Until
further notice, any comments submitted
on paper will be considered to the extent
practicable. The Department of the Trea-
sury (Treasury Department) and the IRS
will publish for public availability any
comment submitted electronically, and
to the extent practicable on paper, to its
public docket.
Send paper submissions to: CC:PA:LP-
D:PR (REG-112042-19), room 5203, In-
ternal Revenue Service, PO Box 7604,
Ben Franklin Station, Washington, D.C.
20044.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regu-
lations, Michael H. Beker or Rachel S.
Smith at (202) 317-6855; concerning sub-
missions of comments and/or requests for
a public hearing, Regina Johnson, (202)
317-5177 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Facilities and Services
Excise Tax Regulations (26 CFR part 49)
under sections 4261, 4262, 4263, 4264,
4271, 4281, and 4282 of the Internal Rev-
enue Code (Code). This document also
contains proposed amendments to the Ex-
cise Tax Procedural Regulations (26 CFR
part 40).
Section 4261 imposes an excise tax on
certain amounts paid for transportation
of persons by air. Section 4271 imposes
an excise tax on certain amounts paid for
transportation of property by air. The ex-
cise taxes imposed by sections 4261 and
4271 (collectively, air transportation ex-
cise tax), as well as certain Federal fuel
taxes, are deposited into the Airport and
Airway Trust Fund, which funds the Fed-
eral Aviation Administration’s (FAA) op-
erations, air transportation infrastructure,
and other aviation-related programs. See
section 9502 of the Code.
Section 13822 of Public Law 115-97,
131 Stat. 2054, 2182 (2017), commonly
referred to as the Tax Cuts and Jobs Act
(TCJA), amended the Code by adding
paragraph (e)(5) to section 4261. The new
provision provides that no tax shall be
imposed by section 4261 or 4271 on any
amount paid by an aircraft owner for air-
craft management services related to: (1)
maintenance and support of the aircraft
owner’s aircraft, or (2) flights on the air-
craft owner’s aircraft.
Section 4261(e)(5)(B) defines the term
“aircraft management services” to include
assisting an aircraft owner with: (1) ad-
ministrative and support services, such
as scheduling, flight planning, and weath-
er forecasting; (2) obtaining insurance;
(3) maintenance, storage, and fueling of
aircraft; (4) hiring, training, and provi-
sion of pilots and crew; (5) establishing
and complying with safety standards; and
(6) such other services as are necessary
to support flights operated by an aircraft
owner.
Section 4261(e)(5)(C)(i) provides that
the term “aircraft owner” includes a per-
son who leases an aircraft other than un-
der a “disqualified lease.” Section 4261(e)
(5)(C)(ii) defines the term “disqualified
lease” for purposes of section 4261(e)(5)
(C)(i) as a lease from a person providing
aircraft management services with respect
to the aircraft (or a related person (within
the meaning of section 465(b)(3)(C)) to
the person providing such services), if the
lease is for a term of 31 days or less.
Finally, section 4261(e)(5)(D) provides
that in the case of amounts paid to any per-
son which (but for section 4261(e)(5)) are
subject to air transportation excise tax, a
portion of which consists of amounts de-
scribed in section 4261(e)(5)(A), section
4261(e)(5) shall apply on a pro rata ba-
sis only to the portion which consists of
amounts described in section 4261(e)(5)
(A).
The Conference Report accompany-
ing the TCJA, H.R. Rep. No. 115-466, at
536 (2017) (Conference Report), explains
that section 4261(e)(5) “exempts certain
payments related to the management of
private aircraft from the excise taxes im-
posed on taxable transportation of persons
by air.” The Conference Report further
explains that certain arrangements that do
not qualify a person as an ‘‘aircraft own-
er’’ for purposes of section 4261(e)(5)
include ownership of stock in a commer-
cial airline and participation in a fraction-
al ownership aircraft program. Id. at 536
n.1190.
With regard to commercial airlines,
the Conference Report specifically states
that ownership of stock in a commercial
airline cannot qualify an individual as an
‘‘aircraft owner’’ of a commercial airline’s
aircraft, and amounts paid for transporta-
tion on such flights remain subject to air
transportation excise tax. Id.
The Conference Report further states
that participation in a fractional owner-
ship aircraft program does not constitute
‘‘aircraft ownership’’ for purposes of sec-
tion 4261(e)(5). Id. Amounts paid to a
fractional ownership aircraft program for
transportation under such a program are
already exempt from air transportation ex-
cise tax pursuant to section 4261(j) if cer-
tain requirements provided in section 4043
of the Code are satisfied, including that
the aircraft is operated under subpart K of
part 91 of Title 14 of the Code of Federal
Regulations (subpart K). Id. Flights under
a fractional ownership aircraft program
are subject to both the fuel tax levied on
noncommercial aviation and an additional
fuel surtax imposed by section 4043 (fuel
surtax). Id. As a result, the Conference Re-
port explains that “a business arrangement
seeking to circumvent the fuel surtax by
operating outside of subpart K, allowing
an aircraft owner the right to use any of
a fleet of aircraft, be it through an aircraft
interchange agreement, through holding
nominal shares in a fleet of aircraft, or any
other arrangement that does not reflect
true tax ownership of the aircraft being
flown upon, is not considered ownership
for purposes of [section 4261(e)(5)].” Id.

August 17, 2020 424 Bulletin No. 2020–34
With regard to the pro rata allocation
rule in section 4261(e)(5)(D), the Confer-
ence Report states that in the event that a
payment made to an aircraft management
company is allocated in part to exempt
services and flights on the aircraft owner’s
aircraft, and in part to flights on aircraft
other than that of the aircraft owner, air
transportation excise tax must be collected
on that portion of the payment attributable
to flights on aircraft not owned by the air-
craft owner. Id. at 536.
Section 4007 of the Coronavirus
Aid, Relief, and Economic Security Act
(CARES Act), Pub. L. 116-136, 134 Stat.
181 (2020), created an excise tax holiday
on certain aviation taxes by suspending air
transportation excise tax and certain fuel
excise taxes from March 28, 2020, through
December 31, 2020. Nothing in these pro-
posed regulations should be construed as
affecting the excise tax holiday created by
the CARES Act. In addition, except with
regard to the provisions in 26 CFR part 40,
the Treasury decision adopting these pro-
posed regulations as final regulations will
apply no sooner than January 1, 2021.
Explanation of Provisions
1.Aircraft Management Services
The proposed regulations provide rules
related to the exemption from air trans-
portation excise tax for amounts paid by
an aircraft owner for aircraft management
services pursuant to section 4261(e)(5).
During the development of these
proposed regulations, the Treasury De-
partment and the IRS received various
requests for guidance from stakeholders
(referred to herein as “commenters”) re-
lated to the first five issues discussed in
part 1 of this Explanation of Provisions.
a. Applicability of Possession, Command,
and Control Test
Commenters requested clarification on
the applicability of the possession, com-
mand, and control test in existing guidance
to amounts paid for aircraft management
services in light of section 4261(e)(5). The
possession, command, and control test is a
facts-and-circumstances analytical frame-
work that is used to determine whether a
person is providing taxable transportation
to another person in cases where each of
the parties contribute some, but not all, of
the elements necessary for complete air
transportation services. See e.g., Rev. Rul.
60-311 (1960-2 C.B. 341), Rev. Rul. 70-
325 (1970-1 C.B. 231), and Rev. Rul. 76-
394 (1976-2 C.B. 355). Section 4261(e)
(5) directly addresses a situation that, but
for section 4261(e)(5), would be analyzed
using the possession, command, and con-
trol test. As a result, in situations to which
the section 4261(e)(5) exemption applies,
the possession, command, and control test
is not relevant.
b. Related-Party Payments
The second issue for which comment-
ers requested guidance relates to the treat-
ment of payments for aircraft manage-
ment services made by a person who has
a close relationship to the aircraft owner,
but is not itself the owner of the aircraft.
The commenters suggested that payments
that are made by certain parties related to
the aircraft owner should be considered as
though made by the aircraft owner.
First, the commenters suggested that
the proposed regulations should treat pay-
ments made by one member of an affili-
ated group (as that term is used in section
4282) on behalf of an aircraft owner that is
a member of the same affiliated group as
being made by the aircraft owner.
Second, the commenters suggested that
payments made by an owner of a special
purpose entity should be treated as being
made by the aircraft owner if the special
purpose entity owns the aircraft. For ex-
ample, individuals and corporations often
create a single member limited liability
company (SMLLC) to own an aircraft in
order to comply with FAA regulations or
limit liability exposure. In such cases, the
owner of the SMLLC often makes pay-
ments for aircraft management services
on behalf of the SMLLC.
Finally, the commenters suggested that
payments made by an aircraft owner’s
family members, as well as other persons
and entities (for example, trusts, as well
as the trust’s fiduciaries and beneficia-
ries) closely related to an aircraft owner
be treated as being made by the aircraft
owner. For this purpose, the commenters
suggested that the proposed regulations
should treat payments for aircraft man-
agement services made on behalf of the
aircraft owner by a family member of the
aircraft owner and by persons and entities
bearing relationships to the aircraft owner
described in sections 267(b) and 707(b) of
the Code as amounts paid by the aircraft
owner.
The Treasury Department and the IRS
understand that it is common practice in
the private aviation sector for persons that
bear certain close relationships to an air-
craft owner to make payments for aircraft
management services on behalf of the air-
craft owner. However, exceptions to tax,
like deductions, are matters of legislative
grace, and such provisions are construed
narrowly. See Comm’r v. Nat’l Alfalfa De-
hydrating & Milling Co., 417 U.S. 134,
148-9 (1974) (“The propriety of a deduc-
tion [...] depends upon legislative grace;
and only as there is clear provision therefor
can any particular deduction be allowed.”
(citations omitted)); Shami v. Comm’r,
741 F.3d 560, 567 (5th Cir. 2014) (“Tax
credits are a matter of legislative grace,
are only allowed as clearly provided for
by statute, and are narrowly construed.”
(citation omitted)); Lettie Pate Whitehead
Found., Inc. v. U.S., 606 F.2d 534, 539
(5th Cir. 1979) (“Deductions are matters
of legislative grace and must be narrow-
ly construed.” (citation omitted)); Chrys-
ler Corp. v. Comm’r, 436 F.3d 644, 654
(6th Cir. 2006) (“While statutes imposing
a tax are generally construed liberally in
favor of the taxpayer, those granting a
deduction are matters of legislative grace
and are strictly construed in favor of the
government.” (citations omitted)). Section
4261(e)(5) specifically states that the ex-
emption applies to “amounts paid by an
aircraft owner” and makes no reference
to any other entity or arrangement. The
Treasury Department and the IRS are con-
cerned that if the regulations were to treat
payments for aircraft management ser-
vices made on behalf of an aircraft owner
(other than in a principal-agent scenario in
which the aircraft owner is the principal)
as being made by the aircraft owner itself,
the regulations would effectively expand
the exemption in a manner not authorized
by Congress.
Additionally, a qualified subchapter S
subsidiary (QSub) (as defined in section
1361(b)(3)(B)) that is generally not treat-
ed as a separate corporation from its S cor-

Bulletin No. 2020–34 425 August 17, 2020
poration owner under section 1361(b)(3)
(A), and a non-corporate, wholly-owned
business entity, such as a SMLLC, that
is disregarded as an entity separate from
its owner for Federal income tax purposes
(under §§301.7701-1 through 301.7701-
3 of the Procedure and Administration
Regulations), are each treated as an entity
separate from its owner for certain Feder-
al excise tax purposes. See §1.1361-4(a)
(8) of the Income Tax Regulations and
§301.7701-2(c)(2)(v). The rules under
§§1.1361-4(a)(8) and 301.7701-2(c)(2)(v)
were adopted because difficulties arose
from the interaction of the rules in section
1361(b)(3)(A) and §§301.7701-1 through
301.7701-3 with the Federal excise tax
rules. It would be contrary to the existing
rules in §§1.1361-4(a)(8) and 301.7701-
2(c)(2)(v) to treat a person or entity that
is separate from the aircraft owner as the
aircraft owner for purposes of the exemp-
tion from air transportation excise tax in
section 4261(e)(5). For these reasons, the
proposed regulations do not adopt the
commenters’ suggestion to provide a re-
lated-party rule.
c. Choice of Flight Rules
The third issue for which commenters
requested guidance relates to whether an
aircraft owner’s decision to operate its
aircraft under certain parts of the Federal
Aviation Regulations (FARs) promulgat-
ed by the FAA affects the application of
section 4261(e)(5). Part 91 of the FARs
governs general aviation. However, some
aircraft owners choose to operate their
aircraft under Part 135 of the FARs (gov-
erning on-demand and commuter flights),
which imposes additional FAA regulatory
requirements related to operational safety
and enhanced liability protection. Com-
menters suggested that the proposed reg-
ulations provide that if an aircraft owner
elects to conduct flights on its own aircraft
under Part 135 of the FARs (rather than
under Part 91 of the FARs), then pay-
ments made by the aircraft owner for air-
craft management services related to those
flights qualify for the exemption provided
in section 4261(e)(5) in the same manner
as a flight conducted under Part 91 of the
FARs.
It has long been the position of the
Treasury Department and the IRS that
rules promulgated by the FAA, including
the FARs, do not control for Federal excise
tax purposes. See Rev. Rul. 78-75 (1978-
1 C.B. 340). Further, section 4261(e)(5)
makes no reference to the FARs; under
the plain language of section 4261(e)(5),
its application does not depend upon the
FAR flight rules under which an aircraft
is operated. The Treasury Department and
the IRS agree with the commenters’ sug-
gestion. Accordingly, the proposed regu-
lations provide that whether an aircraft
owner operates its aircraft pursuant to the
rules under FARs Part 91 or pursuant to
the rules under FARs Part 135 does not af-
fect the application of section 4261(e)(5).
d. Charters
The fourth issue for which commenters
requested guidance relates to situations
in which an aircraft owner permits an air
charter operator (which may or may not be
the same person as the person or persons
providing aircraft management services to
the aircraft owner) to use the aircraft own-
er’s aircraft to provide charter flights. It is
common for an aircraft owner to permit an
air charter operator to use the aircraft own-
er’s aircraft for a fee (in cash or in kind)
when the aircraft would otherwise sit idle
or when the aircraft is being repositioned
and would otherwise not carry any pas-
sengers. In such instances, amounts paid
for charter flights operated on the aircraft
owner’s aircraft are subject to air transpor-
tation excise tax, unless otherwise exempt
from the taxes (for example, in the case of
an aircraft used as an air ambulance ded-
icated to acute care emergency medical
services under section 4261(g)(2)). See
§49.4261-7(h) for the rules regarding the
taxation of charter flights.
The commenters suggested that the
proposed regulations clarify that the ap-
plication of section 4261(e)(5) is not af-
fected by an aircraft owner permitting a
charter operator to use the aircraft own-
er’s aircraft for charter flights. The Trea-
sury Department and the IRS agree with
the commenters that, in general, the appli-
cation of section 4261(e)(5) should not be
affected by an aircraft owner permitting
an aircraft management services provider
or other person to use the aircraft owner’s
aircraft for for-hire flights (such as char-
ter flights, air taxi flights, and flightseeing
flights). Accordingly, the proposed reg-
ulations provide that whether an aircraft
owner permits its aircraft to be used for
for-hire flights does not affect the applica-
tion of section 4261(e)(5) to amounts paid
by the aircraft owner for aircraft manage-
ment services.
The proposed regulations also clari-
fy that to the extent such for-hire flights
are subject to the tax imposed by section
4261 or 4271, taxable fuel (as defined in
section 4083(a) of the Code) or any other
liquid taxable under section 4041(c) of the
Code that is used as fuel on such flights is
used in commercial aviation, as that term
is defined in section 4083(b). See sections
4081(a)(2) and 4041(c) for the applicable
fuel tax rates.
e. Payment Arrangements
The fifth issue for which commenters
requested guidance relates to business
decisions made by a person providing air-
craft management services regarding how
to charge, invoice, or bill (referred to col-
lectively herein as “bill” or “billed”) air-
craft owners for their services. An aircraft
owner may be billed for aircraft manage-
ment services in a variety of ways. For ex-
ample, an aircraft owner may be charged
a monthly fee for aircraft management
services and an hourly fee for each hour
of flight time. Alternatively, an aircraft
owner may be billed for specific costs re-
lated to the operation of the aircraft, plus
a mark-up to compensate the aircraft man-
agement services provider. In addition to
these two examples, there are many other
possible arrangements that may be used to
bill an aircraft owner based on the partic-
ular agreement between an aircraft owner
and the aircraft management services pro-
vider. The commenters suggested that the
proposed regulations should clarify that
the manner in which an aircraft owner is
billed for aircraft management services
should not control whether the exemption
from air transportation excise tax provided
in section 4261(e)(5) applies to amounts
paid for those services.
The Treasury Department and the IRS
agree with the commenters that the man-
ner in which an aircraft owner is billed for
aircraft management services is a business
decision that providers of aircraft manage-
ment services and aircraft owners should

August 17, 2020 426 Bulletin No. 2020–34
be free to make with each other in order to
satisfy their particular needs. Accordingly,
the proposed regulations provide that the
method or manner by which an aircraft
owner is billed for aircraft management
services does not affect whether the ex-
emption from air transportation excise tax
provided in section 4261(e)(5) applies to
amounts paid for those services.
While the proposed regulations ac-
knowledge that the manner in which an
aircraft owner is billed for aircraft man-
agement services is a business decision,
the proposed regulations require both the
aircraft owner and the aircraft manage-
ment services provider to maintain ade-
quate records to show that amounts paid
by the aircraft owner to the aircraft man-
agement services provider relate to air-
craft management services specifically for
the aircraft owner’s aircraft or for flights
on the aircraft owner’s aircraft.
f. Other Proposed Aircraft Management
Services Rules
The proposed regulations clarify that
the exemption from air transportation ex-
cise tax in section 4261(e)(5) is limited to
private aviation. Section 49.4261-10(b)
(6) of the proposed regulations defines
“private aviation” as the use of an aircraft
for civilian flights except scheduled pas-
senger service. This rule is consistent with
the Conference Report, which explicitly
states that section 4261(e)(5) “exempts
certain payments related to the manage-
ment of private aircraft from the excise
taxes imposed on taxable transportation
by air.” Conference Report at 536.
The proposed regulations also clarify
the application of section 4261(e)(5)(D),
which requires a pro rata allocation of the
amounts paid for aircraft management
services between services that relate to
flights taken by an aircraft owner on the
aircraft owner’s aircraft and services that
relate to flights taken by an aircraft owner
on an aircraft that is not owned by the air-
craft owner. An aircraft that is not owned
by the aircraft owner is referred to in the
proposed regulations as a “substitute air-
craft.” Section 4261(e)(5)(D) limits the
section 4261(e)(5) exemption to amounts
paid for aircraft management services re-
lated to flights taken by an aircraft owner
on the aircraft owner’s aircraft. Therefore,
the section 4261(e)(5) exemption does not
extend to those amounts paid for aircraft
management services that relate to flights
taken by an aircraft owner on a substitute
aircraft (that is, an aircraft not owned by
the aircraft owner). The proposed regula-
tions provide that the pro rata allocation is
calculated by applying to the amount paid
by the aircraft owner for aircraft man-
agement services the ratio of flight hours
provided on substitute aircraft during the
calendar quarter over the total flight hours
flown by the aircraft owner on both the
aircraft owner’s aircraft and substitute
aircraft during the calendar quarter. The
Treasury Department and the IRS request
comments regarding whether the proposed
flight hour ratio allocation method is fair
and practicable or whether a different al-
location method should be required (and
if so, what exactly such required method
should be).
In addition, the proposed regulations
clarify that taxable fuel (as defined in
section 4083(a)) or any other liquid tax-
able under section 4041(c) that is used as
fuel on a flight for which amounts paid
are exempt from the taxes imposed by
sections 4261 and 4271 by reason of sec-
tion 4261(e)(5) is not fuel used in com-
mercial aviation, as that term is defined
in section 4083(b). See sections 4081(a)
(2) and 4041(c) for the applicable fuel tax
rates.
Finally, the section 4043 fuel surtax
applies to fuel used in fractional program
aircraft operated under FARs Part 91K
(14 CFR part 91K) but not to fuel used
on flights for which amounts paid are
exempt by reason of section 4261(e)(5).
The Treasury Department and the IRS are
concerned that this creates an incentive
for persons to operate flights that would
otherwise be subject to the section 4043
fuel surtax outside of FARs Part 91K in
order to avoid the surtax. In these instanc-
es, such persons would likely also argue
that amounts paid for aircraft management
services related to the fractional program
aircraft are exempt from air transportation
excise tax under section 4261(e)(5).
To address this issue, the proposed reg-
ulations include an anti-abuse rule provid-
ing that the section 4261(e)(5) exemption
does not apply to any amount paid for
aircraft management services by a partici-
pant in any transaction or arrangement, or
through other means, that seeks to circum-
vent the surtax imposed by section 4043.
In addition, the proposed regulations clar-
ify that the section 4261(e)(5) exemption
does not apply to amounts paid for aircraft
management services related to flights on
fractional program aircraft operated (or
required to be operated) under FARs Part
91K. The proposed regulations also pro-
vide that if an amount paid qualifies for
both the exemption provided in section
4261(e)(5) and the exemption provided
in section 4261(j), the section 4261(j) ex-
emption applies to the amount paid and the
surtax imposed by section 4043 applies to
any liquid used in the fractional program
aircraft as fuel. See sections 4261(j) and
4043. This provision is consistent with the
Conference Report and the definition of
“aircraft owner” in §49.4261-10(b)(3)(B)
in the proposed regulations.
2. Additional Proposed Changes to the
Regulations
a. Changes to Part 40
The privilege to file consolidated re-
turns under section 1501 applies only to
income tax returns and not to excise tax
returns. The proposed regulations add
§40.0-1(d) to note this rule and also re-
flect the rules of §§1.1361-4(a)(8) and
301.7701-2(c)(2)(v) that treat QSubs and
certain business entities as entities sepa-
rate from their owners for Federal excise
tax purposes. See also Revenue Ruling
2008-18 (2008-1 C.B. 674). Thus, pro-
posed §40.0-1(d) treats each business unit
that has, or is required to have, a separate
Employer Identification Number as a sep-
arate person. In the context of air trans-
portation excise tax, this rule applies with
respect to both the person required to pay
the tax under proposed §49.4261-1(b) and
the person required to collect and pay over
the tax under §40.6011(a)-1(a)(3) and sec-
tion 4291 of the Code.
Proposed §40.0-1(d) was originally
proposed on July 29, 2008, in a notice of
proposed rulemaking (REG-155087-05)
published in the Federal Register (73
FR 43890), but the rules in that regulation
project have not been finalized. Because
of the length of time that has passed since
it was originally proposed, this docu-
ment withdraws proposed §40.0-1(d) and

Bulletin No. 2020–34 427 August 17, 2020
re-proposes the provision as part of these
proposed regulations.
Existing §40.6071(a)-3 provides ex-
cise tax return filing rules that apply only
to the quarterly return required under
§40.6011(a)-1(a) for the third calendar
quarter of 2001. The proposed regulations
remove §40.6071(a)-3 in its entirety be-
cause it is obsolete.
b. Changes to Part 49
The existing regulations under section
4261 have not been revised since 1962.
The proposed regulations remove existing
language relating to taxes on transpor-
tation by rail, motor vehicle, and water,
which have been repealed, and otherwise
update the existing regulations to conform
to current law. The proposed regulations
also remove references to exemptions
that were repealed in 1970. More specif-
ically, the proposed regulations update
§49.4261-1 to reflect: (i) the enactment
of the international travel facilities tax in
1970 (Airport and Airway Development
Act of 1970 (AADA), Pub. L. No. 91-
258, 84 Stat. 236 (1970)); (ii) the enact-
ment of the domestic segment tax in 1997
(Taxpayer Relief Act of 1997, Pub. L. No.
105-34, 111 Stat. 788 (1997)), and (iii) the
current statutory exemptions from tax un-
der sections 4261(e)(5), 4261(f), 4261(g),
4261(h), 4261(j), 4281, 4282, and 4293 of
the Code.
Section 49.4261-1(b)(1) of the pro-
posed regulations incorporates the pay-
ment and collection rules in sections
4261(d) and 4291.
Section 49.4261-1(b)(2) of the pro-
posed regulations reflects the statutory
change to section 4263(c) under section
1031 of the Taxpayer Relief Act of 1997,
and case law interpreting that revision.
Under prior law, section 4263(c) provid-
ed that where any tax imposed by section
4261 was not paid at the time payment for
transportation was made, the tax was paid
by the person paying for the transportation
or by the person using the transportation.
In other words, the prior law placed no
payment obligation on the air carrier. The
current version of section 4263(c) provides
that where any tax imposed by section
4261 is not paid at the time the payment
for transportation is made, the air carrier
providing the initial segment of transpor-
tation that begins and ends in the United
States is liable for the tax. Several courts
have rejected arguments that current sec-
tion 4263(c) imposes only secondary lia-
bility for the applicable section 4261 tax
on the air carrier if the tax is not otherwise
collected. See Sundance Helicopters, Inc.
v. U.S., 104 Fed. Cl. 1, 11 (2012) (“The
plain language of IRC [section] 4263(c)
provides that the air carrier is to pay the
tax if it is not otherwise collected. There is
no mention of primary versus secondary
liability in the text of the statute [...] The
language of IRC [section] 4263(c) clear-
ly imposes a payment obligation on the
air carrier.”); Temsco Helicopters, Inc. v.
U.S., 409 F.App’x. 64, 67 (9
th
Cir. 2010)
(“nothing in [section] 4263(c) requires
that the government first attempt to collect
the [air transportation excise tax] from the
purchasers...”); Papillon Airways, Inc. v.
U.S., 105 Fed. Cl. 154, 163 (2012) (IRC
4263(c) makes “the carrier’s liability con-
ditional on whether the tax was collected
at the time payment for transportation was
made, not whether the government is un-
successful at collecting the tax.” (empha-
sis in original)).
Section 49.4261-1(d) of the proposed
regulations generally incorporates the
holdings of Revenue Ruling 71-126
(1971-1 C.B. 363) regarding the general
applicability of the section 4261 taxes to
the transportation of persons on all types
of aircraft, and Revenue Ruling 67-414
(1967-2 C.B. 382) regarding the inappli-
cability of the section 4261 taxes to the
transportation of persons on hovercraft.
Section 49.4261-2 of the proposed
regulations generally updates the existing
regulations to reflect the statutory addi-
tions of the domestic segment tax and the
international travel facilities tax to sec-
tion 4261. This section also incorporates
the holdings in Revenue Ruling 72-309
(1972-1 C.B. 348) and Revenue Ruling
2002-34 (2002-1 C.B. 1150) regarding the
computation of the domestic segment tax
and the international travel facilities tax.
Section 49.4261-9(a) of the proposed
regulations reflects the rule in section
4261(e)(3)(A) regarding the tax treatment
of mileage awards. The Treasury Depart-
ment and the IRS are currently consid-
ering whether to exercise their authority
under section 4261(e)(3)(C) to prescribe
rules for excluding from the tax base
amounts attributable to mileage awards
that are used other than for transporta-
tion of persons by air. See Notice 2015-
76 (2015-46 I.R.B. 669). Nothing in these
proposed regulations can be construed as
an exercise of that authority. The proposed
regulations reserve §49.4261-9(b) for the
possible future exercise of the authority
granted to the Secretary of the Treasury or
his delegate under section 4261(e)(3)(C).
The regulations under sections 4262
and 4263 also have generally not been re-
vised since the 1960s. Amendments to the
Code since then, including the repeal of
the seats and berths tax, a change to the
definition of “uninterrupted international
air transportation” under section 4262(c)
(3), and a change to the rules in section
4263(c), have rendered certain provisions
in the existing regulations obsolete. The
proposed regulations remove obsolete
provisions and generally update the exist-
ing regulations to conform to current law.
Section 4264 of the Code was redes-
ignated as section 4263 in 1970 by Title
II, section 205(c)(2), of the AADA. How-
ever, the regulations under section 4264
were not similarly redesignated. The pro-
posed regulations redesignate the current
section 4264 regulations as section 4263
regulations, remove obsolete provisions,
and generally update the existing regula-
tions to conform to current law.
The proposed regulations update the
rule in §49.4263-5 (which the proposed
regulations redesignate as §49.4281-1)
relating to small aircraft on nonestab-
lished lines to reflect statutory changes to
the exemption. Specifically, the current
regulation provides, in relevant part, that
amounts paid to transport a person on a
small aircraft are “exempt from the tax
imposed under section 4261 provided the
aircraft: (1) has a gross take-off weight of
less than 12,500 pounds [...] and (2) has
a passenger seating capacity of less than
10 adult passengers, including the pilot.”
In 1970, the permissible aircraft weight
to qualify for the exemption for small air-
craft on nonestablished lines was reduced
to a maximum certificated take-off weight
of 6,000 pounds or less and the maximum
passenger seating capacity rule was elim-
inated. AADA, Title II, section 205(a)(1).
In 2005, Congress amended section 4281
to clarify that flights for which the sole
purpose is sightseeing are not considered

August 17, 2020 428 Bulletin No. 2020–34
to be operated on an established line. Safe,
Accountable, Flexible, Efficient Trans-
portation Equity Act: A Legacy for Us-
ers, Pub. L. No. 109-59, section 11124(a),
119 Stat 1144 (2005). In 2012, Congress
amended section 4281 to exclude jet air-
craft from the exemption. FAA Modern-
ization and Reform Act of 2012, Pub. L.
No. 112-95, section 1107(a), 126 Stat 11
(2012). The proposed regulations incor-
porate the changes to the exemption for
small aircraft on nonestablished lines as
described above.
Section 4282 provides an exemption
from the taxes imposed by section 4261
and 4271 for certain transportation by air
for members of an affiliated group. The
Treasury Department and the IRS have
not issued regulations regarding this pro-
vision. The proposed regulations reserve
§49.4282-1 for future rules regarding the
affiliated group exemption under section
4282.
The updates to part 49 in these pro-
posed regulations are not comprehensive
and do not fully update every provision
and example that require modernization.
The updates are intended to address only
the most straightforward and well-set-
tled issues; they are not intended to in-
troduce new rules or address issues that
may require a more nuanced approach.
The Treasury Department and the IRS
believe that these updates will help re-
duce the burden on taxpayers, collectors,
and revenue agents by providing much
needed basic updates to the part 49 reg-
ulations.
Effect on Other Documents
Revenue Ruling 67-414 (1967-2 C.B.
382), Revenue Ruling 72-309 (1972-1
C.B. 348), and Revenue Ruling 2002-34
(2002-1 C.B. 1150) will be obsoleted on
the date these regulations are published
as final regulations in the Federal Reg-
ister.
Partial Withdrawal of Proposed
Regulations
Under the authority of 26 U.S.C. 7805,
§40.0-1(d) of the notice of proposed
rulemaking (REG-155087-05) published
in the Federal Register on July 29, 2008
(73 FR 43890) is withdrawn.
Proposed Applicability Date
The regulations, other than §40.0-1(d),
generally are proposed to apply on and af-
ter the later of the date of publication of a
Treasury decision adopting these rules as
final regulations in the Federal Register
or January 1, 2021. Section 40.0-1(d) of
the regulations is proposed to apply on
and after the date of publication of a Trea-
sury decision adopting these rules as final
regulations in the Federal Register.
Special Analyses
This regulation is not subject to review
under section 6(b) of Executive Order
12866 pursuant to the Memorandum of
Agreement (April 11, 2018) between the
Department of the Treasury and the Office
of Management and Budget regarding re-
view of tax regulations.
Because the regulation does not impose
a collection of information on small enti-
ties a Regulatory Flexibility Act (5 U.S.C.
chapter 6) analysis is not required.
Pursuant to section 7805(f) of the Code
these regulations have been submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on their impact on small business.
Statement of Availability of IRS
Documents
IRS Revenue Procedures, Revenue
Rulings, Notices and other guidance cited
in this document are published in the In-
ternal Revenue Bulletin and are available
from the Superintendent of Documents,
U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the
IRS website at http://www.irs.gov.
Comments and Requests for a Public
Hearing
Before these proposed amendments
to the regulations are adopted as final
regulations, consideration will be given
to comments that are submitted timely
to the IRS as prescribed in the preamble
under the “ADDRESSES” section. The
Treasury Department and the IRS request
comments on all aspects of the proposed
regulations. Any electronic comments
submitted, and to the extent practicable
any paper comments submitted, will be
made available at www.regulations.gov or
upon request.
A public hearing will be scheduled if
requested in writing by any person who
timely submits electronic or written com-
ments. Requests for a public hearing are
also encouraged to be made electronically.
If a public hearing is scheduled, notice of
the date and time for the public hearing
will be published in the Federal Register.
Announcement 2020-4 (2020-17 I.R.B.
1) provides that until further notice, pub-
lic hearings conducted by the IRS will be
held telephonically. Any telephonic hear-
ing will be made accessible to people with
disabilities.
Drafting Information
The principal authors of these regula-
tions are Michael H. Beker and Rachel
S. Smith, Office of the Associate Chief
Counsel (Passthroughs and Special Indus-
tries). However, other personnel from the
Treasury Department and the IRS partici-
pated in their development.
List of Subjects
26 CFR Part 40
Excise taxes, Reporting and record-
keeping requirements.
26 CFR Part 49
Excise taxes, Reporting and record-
keeping requirements, Telephone, Trans-
portation.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 40 and 49
are proposed to be amended as follows:
PART 40—EXCISE TAX
PROCEDURAL REGULATIONS
Paragraph 1. The authority citation for
part 40 is amended by removing the entry
for §40.6071(a)-3 to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 40.0-1 is amended by
redesignating paragraph (d) as paragraph

Bulletin No. 2020–34 429 August 17, 2020
(e), adding a new paragraph (d), and re-
vising newly redesignated paragraph (e)
to read as follows:
§40.0-1 Introduction.
* * * * *
(d) Person. For purposes of this part,
each business unit that has, or is required
to have, a separate employer identifica-
tion number is treated as a separate per-
son. Thus, business units (for example,
a parent corporation and a subsidiary
corporation, a partner and the partner’s
partnership, or the various members of a
consolidated group), each of which has,
or is required to have, a different em-
ployer identification number, are separate
persons.
(e) Applicability date—(1) Paragraphs
(a), (b), and (c). Paragraphs (a), (b), and
(c) of this section apply to returns that re-
late to periods beginning after March 31,
2013. For rules that apply before that date,
see 26 CFR part 40, revised as of April 1,
2013.
(2) Paragraph (d). Paragraph (d) of
this section applies to returns that relate to
periods beginning on or after [date these
regulations are published as final regula-
tions in the Federal Register]. For rules
that apply before that date, see 26 CFR
part 40, revised as of April 1, 2020.
§40.6071(a)-3 [Removed]
Par. 3. Section 40.6071(a)-3 is re-
moved.
PART 49—FACILITIES AND
SERVICES EXCISE TAX
REGULATIONS
Par. 4. The authority citation for part 49
continues to read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 5. Section 49.4261-1 is revised to
read as follows:
§49.4261-1 Imposition of tax; in general.
(a) In general. Section 4261 of the
Internal Revenue Code (Code) imposes
three separate taxes on amounts paid for
certain transportation of persons by air.
Tax attaches at the time of payment for
any transportation taxable under section
4261. The applicability of each section
4261 tax is generally determined on a
flight-by-flight basis.
(1) Percentage tax. Section 4261(a)
imposes a 7.5 percent tax on the amount
paid for the taxable transportation of any
person. See section 4262(a) of the Code
and §49.4262-1(a) for the definition of the
term taxable transportation.
(2) Domestic segment tax. Section
4261(b)(1) imposes a $3 tax (indexed
annually for inflation pursuant to section
4261(e)(4)) on the amount paid for each
domestic segment of taxable transporta-
tion. See section 4261(b)(2) for the defi-
nition of the term domestic segment. The
domestic segment tax does not apply to
a domestic segment beginning or ending
at an airport that is a rural airport for the
calendar year in which the segment begins
or ends (as the case may be). See section
4261(e)(1)(B) for the definition of the
term rural airport.
(3) International travel facilities tax.
Section 4261(c) imposes a $12 tax (in-
dexed annually for inflation pursuant to
section 4261(e)(4)) on any amount paid
(whether within or without the United
States) for any transportation by air that
begins or ends in the United States. The
international travel facilities tax does not
apply to any transportation that is entire-
ly taxable under section 4261(a) (deter-
mined without regard to sections 4281 and
4282). See section 4261(c)(2). A special
rule applies to Alaska and Hawaii flights.
See section 4261(c)(3).
(b) Payment and collection obliga-
tions—(1) In general. The taxes imposed
by section 4261 are collected taxes. In
general, the person making the payment
subject to tax is the taxpayer. See sec-
tion 4261(d). The person receiving the
payment is the collector (also commonly
referred to as the collecting agent). See
section 4291 of the Code. The collector
must collect the applicable tax from the
taxpayer, report the tax on Form 720,
Quarterly Federal Excise Tax Return, and
remit the tax to the Internal Revenue Ser-
vice. See sections 4291, 6011, and 7501
of the Code. See §40.6011(a)-1 of this
chapter and §49.4291-1. The collector
must also make semimonthly deposits of
the taxes imposed by section 4261. See
section 6302(e) of the Code. See §§40.0-
1(c), 40.6302(c)-1, and 40.6302(c)-3 of
this chapter. See section 4263(a) and (c) of
the Code for special rules relating to the
payment and collection of tax.
(2) Failure to collect tax. Where any
tax imposed by section 4261 is not paid
at the time payment for transportation is
made, then, to the extent the tax is not
collected under any other provision of
subchapter C of chapter 33 of the Code,
the tax must be paid by the carrier pro-
viding the initial segment of transpor-
tation that begins or ends in the Unit-
ed States. See section 4263(c). In other
words, if an amount paid for transporta-
tion is subject to tax under section 4261
and the applicable tax is not collected
at the time the payment is made, the
carrier providing the initial segment of
transportation that begins or ends in the
United States is liable for the tax. See
section 6672 of the Code for rules relat-
ing to the application of the trust fund
recovery penalty.
(c) Type of aircraft. The taxes imposed
by section 4261 generally apply regard-
less of the type of aircraft on which the
transportation is provided, provided all of
the other conditions for liability are pres-
ent and no specific statutory exemption
applies. See paragraph (f) of this section
for a list of statutory exemptions from
tax. Amounts paid for the transportation
of persons by air cushion vehicles, also
known as hovercraft, are not subject to the
taxes imposed by section 4261.
(d) Purpose of transportation. The pur-
pose of the transportation (for example,
business or pleasure) is not a factor in de-
termining taxability under section 4261.
(e) Routes. Amounts paid for transpor-
tation may be taxable even if the transpor-
tation is not between two definite points.
Unless otherwise exempt, a payment for
continuous transportation that begins and
ends at the same point is subject to tax. See
section 4281 of the Code and §49.4282-
1 for the exemption for small aircraft on
nonestablished lines.
(f) Exemptions from tax; cross-refer-
ences—(1) Aircraft management services.
For the exemption for certain aircraft
management services, see section 4261(e)
(5) of the Code and §49.4261-10.
(2) Hard minerals, oil, and gas. For
the exemption for certain uses related to
the exploration, development, or removal
of hard minerals, oil, or gas, see section
4261(f)(1).

August 17, 2020 430 Bulletin No. 2020–34
(3) Trees and logging operations. For
the exemption for certain uses related to
trees and logging operations, see section
4261(f)(2).
(4) Air ambulances. For the exemp-
tion for air ambulances providing certain
emergency medical transportation, see
section 4261(g).
(5) Skydiving. For the exemption
for certain skydiving uses, see section
4261(h).
(6) Seaplanes. For the exemption for
certain seaplane segments, see section
4261(i).
(7) Fractionally-owned aircraft. For
the exemption for certain aircraft in frac-
tional ownership aircraft programs, see
section 4261(j).
(8) Small aircraft on nonestablished
lines. For the exemption for certain small
aircraft on nonestablished lines, see sec-
tion 4281 of the Code and §49.4281-1.
(9) Affiliated groups. For the exemp-
tion for certain transportation of members
of an affiliated group, see section 4282.
(10) United States and territories. For
exemptions authorized by the Secretary of
the Treasury or his delegate for the exclu-
sive use of the United States, see section
4293.
(g) Applicability date. This section ap-
plies on and after the later of [date these
regulations are published as final regula-
tions in the Federal Register] or January
1, 2021. For rules that apply before that
date, see 26 CFR part 49, revised as of
April 1, 2020.
Par. 6. Section 49.4261-2 is amended
by:
1. Revising paragraphs (a) and (b).
2. Adding paragraph (d).
The revisions and addition read as fol-
lows:
§49.4261-2 Application of tax.
(a) Tax on total amount paid. The tax
imposed by section 4261(a) of the Internal
Revenue Code (Code) is measured by the
total amount paid for taxable transporta-
tion, whether paid in cash or in kind.
(b) Tax on transportation of each
person. The taxes imposed by section
4261(b) and (c) of the Code are head taxes
and, therefore, apply on a per-passenger
basis. The taxes apply to each passenger
for whom an amount is paid, regardless of
whether the payment is made as a single
lump sum or is made individually for each
passenger. In the case of charter flights for
which a fixed amount is paid, the section
4261(b) and (c) taxes are computed by
multiplying the applicable rate of tax by
the number of passengers transported on
the aircraft.
* * * * *
(d) Applicability date. Paragraphs (a)
and (b) of this section apply on and after
the later of [date these regulations are pub-
lished as final regulations in the Federal
Register] or January 1, 2021. For rules
that apply before that date, see 26 CFR
part 49, revised as of April 1, 2020.
Par. 7. Section 49.4261-3 is amended
by:
1. Removing “§49.4262(c)-1” wherev-
er it appears and adding “§49.4262-3” in
its place.
2. In the first sentence of paragraph (a),
removing “The tax imposed by section
4261(a)” and adding “The taxes imposed
by section 4261(a) and (b) of the Internal
Revenue Code (Code)” in its place.
3. In the second sentence of paragraph
(a), adding “under section 4261(a) and
(b)” at the end of the sentence.
4. Removing (b) introductory text and
(b)(1) and redesignating paragraph (b)(2)
as paragraph (b).
5. Revising newly redesignated para-
graph (b).
6. Revising paragraph (c).
7. In paragraph (d), removing “sec-
tion 4262(b) and §49.4262(b)-1” and
adding “section 4262(b) of the Code and
§49.4262-2” in its place.
8. Adding paragraph (e).
The revisions and additions read as fol-
lows:
§49.4261-3 Payments made within the
United States.
* * * * *
(b) Other transportation. In the case of
transportation, other than that described
in paragraph (a) of this section, for which
payment is made in the United States, the
taxes imposed by section 4261(a) and (b)
apply with respect to the amount paid for
that portion of such transportation by air
which is directly or indirectly from one
port or station in the United States to an-
other port or station in the United States,
but only if such portion is not a part of un-
interrupted international air transportation
within the meaning of section 4262(c)(3)
of the Code and §49.4262-3(c). Transpor-
tation that:
(1) Begins in the United States or the
225–mile zone and ends outside such area,
(2) Begins outside the United States or
the 225–mile zone and ends inside such
area, or
(3) Begins outside the United States and
ends outside such area, is taxable only with
respect to such portion of the transportation
by air which is directly or indirectly from
one port or station in the United States to
another port or station in the United States,
but only if such portion is not a part of “un-
interrupted international air transportation”
within the meaning of section 4262(c)(3)
and §49.4262-3(c). Thus, on a trip by air
from Chicago to London, England, with a
stopover at New York, for which payment
is made in the United States, if the portion
from Chicago to New York is not a part of
“uninterrupted international air transporta-
tion” within the meaning of section 4262(c)
(3) and §49.4262-3(c), the taxes would ap-
ply to the part of the payment which is ap-
plicable to the transportation from Chicago
to New York. However, if the portion from
Chicago to New York is a part of “unin-
terrupted international air transportation”
within the meaning of section 4262(c)(3)
and §49.4262-3(c), the taxes would not ap-
ply.
(c) Method of computing tax on tax-
able portion. Where a payment is made
for transportation which is partially tax-
able under paragraph (b) of this section,
the tax imposed by section 4261(a) may
be computed on that proportion of the to-
tal amount paid which the mileage of the
taxable portion of the transportation bears
to the mileage of the entire trip.
* * * * *
(e) Applicability date. This section
applies on and after the later of [the date
these regulations are published as final
regulations in the Federal Register] or
January 1, 2021. For rules that apply be-
fore that date, see 26 CFR part 49, revised
as of April 1, 2020.
§49.4261-4 [Amended]
Par. 8. Section 49.4261-4 is amended
by:

Bulletin No. 2020–34 431 August 17, 2020
1. In paragraph (a), removing the first
“4261(a)” and add “4261 of the Internal
Revenue Code (Code)” in its place.
2. In paragraph (a), removing “section
4261(a) (see section 4264(d))” and adding
“section 4261 (see section 4263(d) of the
Code)” in its place.
3. In paragraph (b), removing
“§49.4262(c)-1” and adding “§49.4262-
3” in its place.
4. In the first sentence of paragraph (d),
removing “§49.4262(c)-1” and adding
“§49.4262-3” in its place.
5. In the first sentence of paragraph
(d), removing “six-hour” and adding “12-
hour” in its place.
§49.4261-5 [Amended]
Par. 9. Section 49.4261-5 is amended
as follows:
1. In paragraph (a), remove “4261(b)”
wherever it appears and add “4261(a) and
(b)” in its place.
2. In paragraph (c), remove
“§49.4262(b)-1” and add “§49.4262-2” in
its place.
Par. 10. Section 49.4261-7 is amended
by:
1. In the introductory paragraph, re-
moving “4263, 4292, 4293, or 4294” and
adding “4261, 4281, 4282 or 4293 of the
Internal Revenue Code” in its place.
2. Removing and reserving paragraphs
(b), (d), (e), and (g).
3. Revising paragraph (h).
4. In paragraph (i), remove “paragraph
(c) of §49.4261-2 and paragraph (f)(4) of
§49.4261-8” and add “§§49.4261-2(c) and
49.4261-8(f)(4)” in its place.
5. Adding paragraph (k).
The revision and addition read as fol-
lows:
§49.4261-7 Examples of payments
subject to tax.
* * * * *
(h) Aircraft charters—(1) When no
charge is made by the charterer of an
aircraft to the persons transported, the
amount paid by the charterer for the char-
ter of the aircraft is subject to tax.
(2) The charterer of an aircraft who
sells transportation to other persons must
collect and account for the tax with re-
spect to all amounts paid to the charterer
by such other persons. In such case, no
tax will be due on the amount paid by the
charterer for the charter of the aircraft but
it shall be the duty of the owner of the air-
craft to advise the charterer of the charter-
er’s obligation for collecting, accounting
for, and paying over the tax to the Internal
Revenue Service.
* * * * *
(k) Applicability date. Paragraph (h) of
this section applies on and after the later
of [the date these regulations are pub-
lished as final regulations in the Federal
Register] or January 1, 2021. For rules
that apply before that date, see 26 CFR
part 49, revised as of April 1, 2020.
§49.4261-8 [Amended]
Par. 11. Section 49.4261-8 is amended
as follows:
1. In the introductory paragraph, re-
move “4263, 4292, 4293, or 4294” and
add “4261, 4281, 4282 or 4293 of the In-
ternal Revenue Code” in its place.
2. Paragraphs (f)(2), (3), and (5) are re-
moved and reserved.
Par. 12. Section 49.4261-9 is revised to
read as follows:
§49.4261-9 Mileage awards.
(a) Tax imposed. Any amount paid (and
the value of any other benefit provided) to
an air carrier (or any related person) for
the right to provide mileage awards for or
other reductions in the cost of any trans-
portation of persons by air is an amount
paid for taxable transportation and is
therefore subject to the tax imposed by
section 4261(a) of the Internal Revenue
Code. See section 4261(e)(3)(A).
(b) [Reserved]
(c) Applicability date. This section ap-
plies on and after the later of [date these
regulations are published as final regula-
tions in the Federal Register] or January
1, 2021.
Par. 13. Section 49.4261-10 is revised
to read as follows:
§49.4261-10 Aircraft management
services.
(a) In general—(1) Overview. This
section prescribes rules relating to the
exemption from tax for amounts paid (in
cash or in kind) by an aircraft owner to
an aircraft management services provider
for certain aircraft management services.
Pursuant to section 4261(e)(5) of the In-
ternal Revenue Code (Code), the taxes
imposed by sections 4261 and 4271 of the
Code do not apply to amounts paid by an
aircraft owner to an aircraft management
services provider for aircraft management
services related to maintenance and sup-
port of the aircraft owner’s aircraft; or
related to flights (flight services) on the
aircraft owner’s aircraft. The exemption
in section 4261(e)(5) applies to amounts
paid by an aircraft owner to an aircraft
management services provider for flight
services on the aircraft owner’s aircraft,
even if the aircraft owner is not on the
flight. The exemption in section 4261(e)
(5) does not apply to amounts paid to an
aircraft management services provider on
behalf of an aircraft owner (other than in
a principal-agent scenario in which the
aircraft owner is the principal). For exam-
ple, amounts paid for aircraft management
services by one member of an affiliated
group (as that term is defined in section
4282 of the Code) for flights on an aircraft
owned by another member of the affiliat-
ed group are not treated as amounts paid
by the aircraft owner. See paragraph (b) of
this section for definitions of terms used
in this section.
(2) Private aviation. The exemption
in section 4261(e)(5) is limited to aircraft
management services related to aircraft
used in private aviation.
(3) Adequate records required. In or-
der to qualify for the exemption in section
4261(e)(5), an aircraft owner and aircraft
management services provider must main-
tain adequate records to show that the
amounts paid by the aircraft owner to the
aircraft management services provider re-
late to aircraft management services spe-
cifically for the aircraft owner’s aircraft or
for flights on the aircraft owner’s aircraft.
(b) Definitions. This paragraph pro-
vides definitions applicable to this section.
(1) Aircraft management services.
The term aircraft management services
means—
(i) Statutory services. The services list-
ed in section 4261(e)(5)(B); and
(ii) Other services. Any service (in-
cluding, but not limited to, purchasing
fuel, purchasing aircraft parts, and arrang-

August 17, 2020 432 Bulletin No. 2020–34
ing for the fueling of an aircraft owner’s
aircraft) provided directly or indirectly by
an aircraft management services provid-
er to an aircraft owner, that is necessary
to keep the aircraft owner’s aircraft in an
airworthy state or to provide air transpor-
tation to the aircraft owner on the aircraft
owner’s aircraft at a level and quality of
service required under the agreement be-
tween the aircraft owner and the aircraft
management services provider.
(2) Aircraft management services pro-
vider. The term aircraft management ser-
vices provider means a person that pro-
vides aircraft management services, as
defined in paragraph (b)(1) of this section,
to an aircraft owner, as defined in para-
graph (b)(3) of this section.
(3) Aircraft owner—(i) In general. The
term aircraft owner means an individual
or entity that leases or owns (that is, holds
title to or substantial incidents of owner-
ship in) an aircraft managed by an aircraft
management services provider (common-
ly referred to as a managed aircraft). The
term aircraft owner does not include a
lessee of an aircraft under a disqualified
lease, as defined in paragraph (b)(4) of
this section. A person that owns stock in a
commercial airline does not qualify as an
aircraft owner of that commercial airline’s
aircraft.
(ii) Fractional aircraft ownership and
similar arrangements. A participant in a
fractional aircraft ownership program, as
defined in section 4043(c)(2) of the Code,
does not qualify as an aircraft owner of the
program’s managed aircraft if the amount
paid for such person’s participation is
exempt from the taxes imposed by sec-
tions 4261 and 4271 by reason of section
4261(j). Similarly, a participant in a busi-
ness arrangement seeking to circumvent
the surtax imposed by section 4043 by op-
erating outside of subpart K of 14 CFR part
91, that allows an aircraft owner the right
to use any of a fleet of aircraft (through an
aircraft interchange agreement, through
holding nominal shares in a fleet of air-
craft, or any other similar arrangement), is
not an aircraft owner with respect to any
of the aircraft owned or leased as part of
that business arrangement.
(4) Disqualified lease. The term dis-
qualified lease has the meaning given
to it by section 4261(e)(5)(C)(ii). A dis-
qualified lease also includes any arrange-
ment that seeks to circumvent the rule in
section 4261(e)(5)(C)(ii) by providing
a lease term that is greater than 31 days
but does not provide the lessee with ex-
clusive and uninterrupted access and use
of the leased aircraft, as identified by the
aircraft’s airframe serial number and tail
number. For purposes of the preceding
sentence, the fact that a lease permits
the lessee to use the aircraft for for-hire
flights, as defined in paragraph (b)(5) of
this section, when the lessee is otherwise
not using the aircraft does not, because of
this fact alone, cause a lease with a term
that is greater than 31 days to be a dis-
qualified lease.
(5) For-hire flight. The term for-hire
flight means the use of an aircraft to trans-
port passengers for compensation that is
paid in cash or in kind. The term includes,
but is not limited to, charter flights, air taxi
flights, and sightseeing flights (commonly
referred to as flightseeing flights).
(6) Private aviation. The term private
aviation means the use of an aircraft for
civilian flights except scheduled passen-
ger service.
(7) Substitute aircraft. The term substi-
tute aircraft means an aircraft, other than
the aircraft owner’s aircraft, that is pro-
vided by an aircraft management services
provider to the aircraft owner when the
aircraft owner’s aircraft is not available,
regardless of the reason for the unavail-
ability.
(c) Substitute Aircraft—(1) Allocation
required. If an aircraft management ser-
vices provider provides flight services to
an aircraft owner on a substitute aircraft
during a calendar quarter, the taxes im-
posed by section 4261 (including the tax-
es imposed by section 4261(b) or (c), as
appropriate, on each passenger transport-
ed) or 4271, as the case may be, apply to
that portion of the amounts paid by the
aircraft owner to the aircraft management
services provider, determined on a pro
rata basis, as described in paragraph (c)
(2) of this section, that are related to the
flight services provided on the substitute
aircraft.
(2) How calculated. The allocation
described in paragraph (c)(1) of this sec-
tion is calculated by applying to the total
amount paid by an aircraft owner to an
aircraft management services provider
during the calendar quarter the ratio of—
(i) Substitute aircraft hours. The total
flight hours provided on substitute aircraft
during the calendar quarter; over
(ii) Total hours. The sum of—
(A) The total flight hours made on the
aircraft owner’s aircraft during the calen-
dar quarter; and
(B) The total flight hours provided to
the aircraft owner on substitute aircraft
during the calendar quarter.
(d) Choice of flight rules. Whether a
flight on an aircraft owner’s aircraft op-
erates pursuant to the rules under Federal
Aviation Regulations prescribed by the
Federal Aviation Administration (FARs)
Part 91 (14 CFR part 91) or pursuant to
the rules under FARs Part 135 (14 CFR
part 135) does not affect the application of
section 4261(e)(5).
(e) Aircraft available for hire—(1) In
general. Whether an aircraft owner per-
mits an aircraft management services pro-
vider or other person to use its aircraft to
provide for-hire flights (for example, when
the aircraft is not being used by the aircraft
owner or when the aircraft is being moved
in deadhead service) does not affect the
application of section 4261(e)(5). How-
ever, an amount paid for for-hire flights
on the aircraft owner’s aircraft does not
qualify for the section 4261(e)(5) exemp-
tion. Therefore, an amount paid for a for-
hire flight on an aircraft owner’s aircraft
is subject to the tax imposed by section
4261 or 4271, as the case may be, unless
the amount paid is otherwise exempt from
the tax imposed by section 4261 or 4271
other than by reason of section 4261(e)(5).
See §49.4261-7(h) for rules relating to the
application of the tax imposed by section
4261 on amounts paid for charter flights.
(2) Fuel used on for-hire flights. To the
extent amounts paid for for-hire flights
are subject to the tax imposed by section
4261 or 4271, taxable fuel (as defined in
section 4083(a) of the Code) or any liq-
uid taxable under section 4041(c) of the
Code that is used as fuel on such flights is
used in commercial aviation, as that term
is defined in section 4083(b). See sections
4081(a)(2) and 4041(c) for the applicable
fuel tax rates.
(f) Billing methods. Except as provided
in paragraph (a)(3) of this section (relating
to adequate records), the method an air-
craft management services provider bills,
invoices, or otherwise charges an aircraft

Bulletin No. 2020–34 433 August 17, 2020
owner for aircraft management services,
whether by specific itemization of costs,
flat monthly or hourly fee, or otherwise,
does not affect the application section
4261(e)(5).
(g) Coordination with fuel tax provi-
sions. Taxable fuel (as defined in section
4083(a)) or any liquid taxable under sec-
tion 4041(c) that is used as fuel on a flight
for which amounts paid are exempt from
the taxes imposed by sections 4261 and
4271 by reason of section 4261(e)(5) is
not fuel used in commercial aviation, as
that term is defined in section 4083(b).
See sections 4081(a)(2) and 4041(c) for
the applicable fuel tax rates.
(h) Multiple aircraft management ser-
vices providers not disqualifying. Wheth-
er an aircraft owner pays amounts to more
than one aircraft management services
provider for aircraft management services
does not affect the application of section
4261(e)(5).
(i) Coordination with exemption for
aircraft in fractional ownership aircraft
programs and fuel surtax; no choice of
exemption; anti-abuse rule. The exemp-
tion in section 4261(e)(5) does not apply
to any amount paid for aircraft manage-
ment services by a participant in any
transaction or arrangement, or through
other means, that seeks to circumvent the
surtax imposed by section 4043. Further,
the exemption in section 4261(e)(5) does
not apply to any amounts paid for aircraft
management services related to flights that
are (or are required to be) operated under
FARs Part 91K (14 CFR part 91K). As a
result, if an amount paid qualifies for both
the exemption provided in section 4261(e)
(5) and the exemption provided in section
4261(j), the exemption provided in section
4261(j) applies to the amount paid and the
surtax imposed by section 4043 applies to
any liquid used in the managed aircraft as
fuel. See sections 4261(j) and 4043.
(j) Examples. The following examples
illustrate the provisions of this section.
(1) Example 1—(i) Facts. An aircraft owner,
which is organized as corporation under state law,
pays a monthly fee of $1,000 to an aircraft manage-
ment services provider for the provision of a pilot
for flights on the aircraft owner’s aircraft to transport
employees of the aircraft owner’s business to busi-
ness meetings. The flights constitute taxable trans-
portation, as that term is defined in section 4262(a),
and no exemptions (other than section 4261(e)(5))
apply. During the first calendar quarter of 2020, the
pilot provides 200 flight hours of service on the air-
craft owner’s aircraft and 50 hours of service on a
substitute aircraft.
(ii) Analysis. The tax imposed by section 4261(a)
applies on a pro rata basis to the pilot’s flight hours
on a substitute aircraft. The allocation is calculat-
ed by applying to the $3,000 total amount paid (3
months x $1,000 monthly fee) by the aircraft owner
to the aircraft management services provider during
the calendar quarter the ratio of: 50 (the total pilot
flight hours provided on substitute aircraft during the
calendar quarter) over 250 (the sum of the total pilot
flight hours on the aircraft owner’s aircraft during
the calendar quarter and the total pilot flight hours
provided on substitute aircraft during the calendar
quarter). The computation is as follows: $3,000 x
(50/250) = $600 (amount subject to tax). The portion
of the amount paid that is exempt from the section
4261 taxes by application of section 4261(e)(5) is
$2,400. The portion of the amount paid that is sub-
ject to the tax imposed by section 4261(a) is $600.
The tax imposed by section 4261(b) also applies to
amounts paid for flights on substitute aircraft on a
per-passenger basis. See §49.4261-2(b) for rules re-
garding the application of the tax imposed by section
4261(b).
(2) Example 2—(i) Facts. An aircraft owner pays
a monthly fee to an aircraft management services
provider for aircraft management services related to
the aircraft owner’s aircraft. When the aircraft is not
being used by the owner, the owner sometimes per-
mits a charter company to use the aircraft for charter
flights. At other times when the aircraft is not being
used by the owner, the owner permits a tour operator
to use the aircraft for flightseeing tours. All charter
and flightseeing flights on the aircraft constitute
taxable transportation, as that term is defined in sec-
tion 4262(a), and no exemptions (other than section
4261(e)(5)) apply. The aircraft’s maximum certificat-
ed takeoff weight is 7,000 pounds and the aircraft
uses kerosene as fuel.
(ii) Analysis. Amounts paid by the aircraft own-
er to the aircraft management services provider for
aircraft management services related to the air-
craft owner’s own aircraft are exempt under sec-
tion 4261(e)(5). Amounts paid by the charterer or
passengers for the charter flights are subject to tax
under section 4261(a) and (b). See §49.4261-7(h)
for rules relating to the application of the tax im-
posed by section 4261 on amounts paid for charter
flights. See §49.4261-2(b) for rules regarding the
application of the tax imposed by section 4261(b).
Amounts paid by flightseeing customers for flight-
seeing tours are also subject to tax under section
4261(a) and (b). If a payment for a flightseeing tour
includes charges for nontransportation services, the
charges for the nontransportation services may be
excluded in computing the tax payable provided
the payments are separable and provided in exact
amounts. See §49.4261-2(c). The kerosene used as
fuel on the charter flights and the flightseeing flights
is subject to the tax imposed by section 4081(a) at
the commercial rate.
(k) Applicability date. This section ap-
plies on and after the later of [date these
regulations are published as final regula-
tions in the Federal Register] or January
1, 2021.
§49.4262(a)-1 [Redesignated]
Par. 14. Section 49.4262(a)-1 is redes-
ignated as §49.4262-1.
Par. 15. Newly redesignated §49.4262-
1 is amended by:
1. In paragraph (a) introductory
text, removing “section 4262(b) (see
§49.4262(b)-1)” and adding “section
4262(b) of the Internal Revenue Code
(Code) (see §49.4262-2)” in its place.
2. In the first sentence of paragraph (a)
(1), removing “Transportation” and add-
ing “Transportation by air” in its place.
3. In the first sentence of paragraph (a)
(1), removing “(the “225-mile zone”)”
and adding “(225-mile zone)” in its place.
4. Revising paragraphs (a)(2) and (b)
(2).
5. In paragraph (b), removing “sub-
paragraphs (1) and (5) of this paragraph”
and adding “paragraph (b)(1) and (5) of
this section” in its place.
6. In paragraph (b), removing “subject
to the tax” and adding “subject to the taxes
imposed by section 4261(a) and (b)” in its
place.
7. Removing and reserving paragraph
(c).
8. Revising introductory paragraph (d);
designating Example (1) as paragraph (d)
(1) and revising new paragraph (d)(1) Ex-
ample 1.
9. In paragraph (d), designating Ex-
ample (2) as (d)(2) and removing and re-
serving newly designated paragraph (d)(2)
Example 2.
10. In paragraph (d), designating Exam-
ple (3) as paragraph (d)(3) and removing
“6 hours” wherever it appears and adding
“12 hours” in its place and also removing
“subject to tax” wherever it appears and
adding “subject to the taxes imposed by
section 4261(a) and (b)” in its place.
11. In paragraph (d), designating Ex-
ample (4) as paragraph (d)(4), and re-
moving “six hours” wherever it appears
and adding “12 hours” in its place and
also removing “subject to tax” wherever
it appears and adding “subject to the taxes
imposed by section 4261(a) and (b)” in its
place.
12. Revising paragraph (e).
13. Adding paragraph (f).
The revisions and addition read as fol-
lows:

August 17, 2020 434 Bulletin No. 2020–34
§49.4262-1 Taxable transportation.
(a) * * *
(2) In the case of any other transporta-
tion by air, that portion of such transporta-
tion that is directly or indirectly from one
port or station in the United States to an-
other port or station in the United States,
but only if such transportation is not part of
uninterrupted international air transporta-
tion within the meaning of section 4262(c)
(3) of the Code and §49.4262-3(c). Trans-
portation from one port or station in the
United States occurs whenever a carrier, af-
ter leaving any port or station in the United
States, makes a regularly scheduled stop at
another port or station in the United States
irrespective of whether stopovers are per-
mitted or whether passengers disembark.
* * * * *
(b) * * *
(2) New York to Vancouver, Canada,
with a stop at Toronto, Canada;
* * * * *
(d) Examples. The following exam-
ples illustrate the application of section
4262(a)(2) and the taxes imposed by sec-
tion 4261(a) and (b) of the Code:
(1) Example (i). A purchases in New York a tick-
et for air transportation from New York to Nassau,
Bahamas, with a scheduled stopover of 14 hours
in Miami. The part of the transportation from New
York to Miami is taxable transportation as defined in
section 4262(a) because such transportation is from
one station in the United States to another station in
the United States and the trip is not uninterrupted in-
ternational air transportation (because the scheduled
stopover interval in Miami is greater than 12 hours).
Therefore, the amount paid for the transportation
from New York to Miami is subject to the taxes im-
posed by section 4261(a) and (b).
* * * * *
(e) Examples of transportation that is
not taxable transportation. The following
examples illustrate transportation that is
not taxable transportation:
(1) New York to Trinidad with no inter-
vening stops;
(2) Minneapolis to Edmonton, Canada,
with a stop at Winnipeg, Canada;
(3) Los Angeles to Mexico City, Mexi-
co, with stops at Tijuana and Guadalajara,
Mexico;
(4) New York to Whitehorse, Yukon
Territory, Canada, by air with a sched-
uled stopover in Chicago of five hours.
Amounts paid for the transportation re-
ferred to in examples set forth in para-
graphs (e)(1), (2), and (3) of this section
are not subject to the tax regardless of
where payment is made, since none of the
trips:
(i) Begin in the United States or in
the 225–mile zone and end in the United
States or in the 225–mile zone, nor
(ii) Contain a portion of transportation
which is directly or indirectly from one
port or station in the United States to an-
other port or station in the United States.
The amount paid within the United States
for the transportation referred to in the
example set forth in paragraph (4) of this
section is not subject to tax since the en-
tire trip (including the domestic portion
thereof) is “uninterrupted international
air transportation” within the meaning of
section 4262(c)(3) and paragraph (c) of
§49.4262-3. In the event the transporta-
tion is paid for outside the United States,
no tax is due since the transportation does
not begin and end in the United States.
* * * * *
(f) Applicability date. This section ap-
plies on and after the later of [date these
regulations are published as final regula-
tions in the Federal Register] or January
1, 2021. For rules that apply before that
date, see 26 CFR part 49, revised as of
April 1, 2020.
§49.4262(b)-1 [Redesignated]
Par. 16. Section 49.4262(b)-1 is redes-
ignated as §49.4262-2.
§49.4262-2 [Amended]
Par. 17. Newly redesignated §49.4262-
2 is amended as follows:
1. In paragraph (a), “section 4262(b)”
is removed and “section 4262(b) of the
Internal Revenue Code” is added in its
place.
2. In paragraph (b)(2), Example (2) is
removed and reserved.
3. Revise paragraph (d). “Illustration”
and add “Example” in its place.
The revisions and additions reads as
follows:
§49.4262-2 Exclusion of certain travel.
* * * * *
(d) Example. The application of para-
graph (c) of this section may be illustrated
by the following example: A purchases in
San Francisco a ticket for transportation
by air to Honolulu, Hawaii. The portion
of the transportation which is outside the
continental United States and is outside
Hawaii is excluded from taxable transpor-
tation. The tax applies to that part of the
payment made by A which is applicable
to the portion of the transportation be-
tween the airport in San Francisco and the
three-mile limit off the coast of California
(a distance of 15 miles) and between the
three-mile limit off the coast of Hawaii
and the airport in Honolulu (a distance of
5 miles). The part of the payment made by
A which is applicable to the taxable por-
tion of his transportation and the tax due
thereon are computed in accordance with
paragraph (c)(1) as follows:
Mileage of entire trip (San Francisco airport to Honolulu airport) (miles).............................................
2,400
Mileage in continental United States (miles).......................15
Mileage in Hawaii (miles)................................................5
20
Fare from San Francisco to Honolulu................................$168.00
Payment for taxable portion (20/2400 x $168).....................$1.40
Tax due (7.5% (rate in effect on date of payment) x $1.40)...$0.11

Bulletin No. 2020–34 435 August 17, 2020
(All distances and fares assumed for
purposes of this example. This example
only addresses the computation of the tax
imposed by section 4261(a). It does not
address the computation of any other tax
imposed by section 4261 that may apply
to these facts.)
§49.4262(c)-1 [Redesignated]
Par. 18. Section 49.4262(c)-1 is redes-
ignated as §49.4262-3.
Par. 19. Newly redesignated §49.4262-
3 is amended as follows:
1. In the first sentence of paragraph (a),
remove “includes only the 48 States exist-
ing on July 25, 1956 (the date of the en-
actment of the Act of July 25, 1956 (Pub.
L. 796, 84th Cong., 70 Stat. 644) and the
District of Columbia” and add “means the
District of Columbia and the States other
than Alaska and Hawaii” in its place.
2. In paragraph (a), the last sentence is
removed.
3. In paragraph (c), remove “six hours”
wherever it appears and add “12 hours” in
its place.
4. In paragraph (c), remove “6 hours”
wherever it appears and add “12 hours” in
its place.
5. In paragraph (c), remove “six-hour”
wherever it appears and add “12-hour” in
its place.
6. In paragraph (c)(2), remove “para-
graph (a)(2) of §49.4264(c)-1” and add
“§49.4263-3(a)(2)” in its place.
7. Adding paragraphs (d) and (e).
The additions read as follows:
§49.4262-3 Definitions.
* * * * *
(d) Transportation. For purposes of the
regulations in this subpart, the term transpor-
tation includes layover or waiting time and
movement of the aircraft in deadhead service.
(e) Applicability date. This section ap-
plies on and after the later of [date these reg-
ulations are published as final regulations in
the Federal Register] or January 1, 2021.
For rules that apply before that date, see 26
CFR part 49, revised as of April 1, 2020.
§49.4263-5 [Redesignated]
Par. 20. Section 49.4263-5 is redesig-
nated as §49.4281-1.
Par. 21. Newly redesignated §49.4281-
1 is amended by:
1. Revising paragraphs (a) and (b).
2. In paragraph (c), adding a sentence
at the end of the paragraph.
3. Adding paragraphs (d) and (e).
The revisions and additions read as fol-
lows:
§49.4281-1 Small aircraft on
nonestablished lines.
(a) In general. Amounts paid for the
transportation of persons on a small air-
craft of the type sometimes referred to as
air taxis shall be exempt from the tax im-
posed under section 4261 of the Internal
Revenue Code provided the aircraft has
a maximum certificated takeoff weight
of 6,000 pounds or less determined as
provided in paragraph (b) of this section.
The exemption does not apply, however,
when the aircraft is operated on an es-
tablished line or when the aircraft is a jet
aircraft.
(b) Maximum certificated takeoff
weight. The term maximum certificated
takeoff weight means the maximum cer-
tificated takeoff weight shown in the type
certificate or airworthiness certificate is-
sued by the Federal Aviation Administra-
tion.
(c) * * * An aircraft is not considered as
operated on an established line at any time
during which the aircraft is being operat-
ed on a flight the sole purpose of which is
sightseeing.
(d) Jet aircraft. For purposes of this
section, the term jet aircraft does not in-
clude any aircraft which is a rotorcraft
(such as a helicopter) or propeller air-
craft.
(e) Applicability date. This section ap-
plies on and after the later of [date these
regulations are published as final regula-
tions in the Federal Register] or January
1, 2021. For rules that apply before that
date, see 26 CFR part 49, revised as of
April 1, 2020.
§49.4264(a)-1 [Redesignated]
Par. 22. Section 49.4264(a)-1 is redes-
ignated as §49.4263-1.
Par. 23. Newly redesignated §49.4263-
1 is revised to read as follows:
§49.4263-1 Duty to collect the tax;
payments made outside the United States.
Where payment upon which tax is
imposed by section 4261 of the Internal
Revenue Code is made outside the United
States for a prepaid order, exchange or-
der, or similar order, the person furnishing
the initial transportation pursuant to such
order shall collect the applicable tax. See
section 4291 and the regulations thereun-
der for cases where persons receiving pay-
ment must collect the tax.
§49.4264(b)-1 [Redesignated]
Par. 24. Section 49.4264(b)-1 is redes-
ignated as §49.4263-2.
§49.4263-2 [Amended]
Par. 25. Newly redesignated §49.4263-
2 is amended as follows:
1. In the first sentence of paragraph
(a), remove “4264(b)” and add “4263(b)
of the Internal Revenue Code (Code)” in
its place.
2. In the last sentence of paragraph (a),
remove “office of the district director for
the district in which the person making the
report is located,” and add “Commission-
er” in its place.
3. In paragraph (b), add “of the Code”
at the end of the paragraph.
4. In paragraph (c), remove “Illustra-
tion.” and add “Example.” in its place.
5. In the last sentence of paragraph (c),
remove “office of the district director of
internal revenue for the district in which
the carrier is located,” and add in its place
“Commissioner”.
§49.4264(c)-1 [Redesignated]
Par. 26. Section 49.4264(c)-1 is redes-
ignated as §49.4263-3.
Par. 27. Newly redesignated §49.4263-
3 is amended by:
1. Removing “a district director” wher-
ever it appears and adding “Commission-
er” in its place.
2. Revising paragraph (a).
3. In paragraph (b), removing the sec-
ond sentence.
4. In paragraph (b), removing “4264”
wherever it appears and adding “4263” in
its place.

August 17, 2020 436 Bulletin No. 2020–34
5. In paragraph (b), add “of the Code”
after “4291”.
6. Removing and reserving paragraph
(c).
The revisions read as follows:
§49.4263-3 Special rule for the payment
of tax.
(a) In general—(1) For the rules appli-
cable under section 4263(c) of the Internal
Revenue Code, see §49.4261-1(b).
* * * * *
§49.4264(d)-1 [Redesignated]
Par. 28. Section 49.4264(d)-1 is redes-
ignated as §49.4263-4.
§49.4263-4 [Amended]
Par. 29. Newly redesignated §49.4263-
4 is amended by removing “4264(d)” and
adding “4263(d)” in its place.
§49.4264(e)-1 [Redesignated]
Par. 30. Section 49.4264(e)-1 is redes-
ignated as §49.4263-5.
§49.4264(f)-1 [Redesignated]
Par. 31. Section 49.4264(f)-1 is redes-
ignated as §49.4263-6.
§49.4263-6 [Amended]
Par. 32. Newly redesignated §49.4263-
6 is amended by removing and reserving
paragraph (b).
Par. 33. In § 49.4271-1, revise para-
graphs (a) and (b) to read as follows:
§49.4271-1 Tax on transportation of
property by air.
(a) Purpose of this section. Section
4271 of the Internal Revenue Code
(Code) imposes a 6.25% tax on amounts
paid within or without the United States
for the taxable transportation of prop-
erty (as defined in section 4272). This
section sets forth rules as to the gener-
al applicability of the tax. This section
also sets forth rules authorized by sec-
tion 4272(b)(2) of the Code which ex-
empt from tax payments for the trans-
portation of property by air in the course
of exportation (including shipment to a
possession of the United States) by con-
tinuous movement, and in due course so
exported.
(b) Imposition of tax. (1) The tax im-
posed by section 4271 applies only to
amounts paid to persons engaged in the
business of transporting property by air
for hire.
(2) The tax imposed by section 4271
does not apply to amounts paid for the
transportation of property by air if such
transportation is furnished on an air-
craft having a maximum certificated
takeoff weight (as defined in section
4281(b) of the Code) of 6,000 pounds
or less, unless such aircraft is operated
on an established line or when such air-
craft is a jet aircraft. The tax imposed
by section 4271 also does not apply to
any payment made by one member of
an affiliated group (as defined in section
4282(b) of the Code) to another mem-
ber of such group for services furnished
in connection with the use of an aircraft
if such aircraft is owned or leased by a
member of the affiliated group and is not
available for hire by persons who are not
members of such group.
* * * * *
Par. 34. Section 49.4271-2 is added to
read as follows:
§49.4271-2 Aircraft management
services.
For rules regarding the exemption for
certain amounts paid by aircraft owners
for aircraft management services, see
§49.4261-10.
§49.4282-1 [Reserved]
Par. 35. Add and reserve §49.4282-1.
Sunita Lough,
Deputy Commissioner for Services
and Enforcement.
(Filed by the Office of the Federal Register on July
29, 2005, 11:15 a.m., and published in the issue of the
Federal Register for July 31, 2020, 85 F.R. 46032)
Notice of Proposed
Rulemaking
Small Business Taxpayer
Exceptions Under Sections
263A, 448, 460 and 471
REG-132766-18
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed regulations to implement legis-
lative changes to sections 263A, 448, 460,
and 471 of the Internal Revenue Code
(Code) that simplify the application of
those tax accounting provisions for certain
businesses having average annual gross
receipts that do not exceed $25,000,000,
adjusted for inflation. This document also
contains proposed regulations regarding
certain special accounting rules for long-
term contracts under section 460 to im-
plement legislative changes applicable to
corporate taxpayers. The proposed regula-
tions generally affect taxpayers with aver-
age annual gross receipts of not more than
$25 million (adjusted for inflation). Addi-
tionally, this document contains a request
for comments regarding the application of
section 460 (or other special methods of
accounting) to a contract with income that
is accounted for in part under section 460
(or other special method) and in part under
section 451.
DATES: Written or electronic comments
or a request for a public hearing must be
received by September 14, 2020.
ADDRESSES: Commenters are strongly
encouraged to submit public comments
electronically. Submit electronic submis-
sions via the Federal eRulemaking Portal
at www.regulations.gov (indicate IRS and
REG-132766-18) by following the online
instructions for submitting comments.
Once submitted to the Federal eRulemak-
ing Portal, comments cannot be edited

Bulletin No. 2020–34 437 August 17, 2020
or withdrawn. The IRS expects to have
limited personnel available to process
public comments that are submitted on
paper through mail. Until further notice,
any comments submitted on paper will be
considered to the extent practicable. The
Department of the Treasury (Treasury
Department) and the IRS will publish for
public availability any comment submit-
ted electronically, and to the extent practi-
cable on paper, to its public docket.
Send paper submissions to: CC:PA:LP-
D:PR (REG-132766-18), room 5203, In-
ternal Revenue Service, PO Box 7604,
Ben Franklin Station, Washington, D.C.
20044.
FOR FURTHER INFORMATION
CONTACT: Concerning proposed
§§1.460-1 through 1.460-6, Innessa
Glazman, (202) 317-7006; concerning all
other proposed regulations in this docu-
ment, Anna Gleysteen, (202) 317-7007;
concerning submission of comments and/
or requests for a public hearing, Regina
Johnson, (202) 317-5177 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Income Tax Regu-
lations (26 CFR part 1) to implement
statutory amendments to sections 263A,
448, 460, and 471 of the Code made by
section 13102 of Public Law No. 115-97
(131 Stat. 2054), commonly referred to as
the Tax Cuts and Jobs Act (TCJA). These
statutory amendments generally simplify
the application of the method of account-
ing rules under those provisions to certain
businesses (other than tax shelters) with
average annual gross receipts that do not
exceed $25,000,000, adjusted for infla-
tion.
This document also contains proposed
amendments to the existing regulations
under section 460 regarding the special
accounting rules for long-term contracts
to implement amendments to the Code
applicable to corporate taxpayers made by
TCJA sections 12001 (repealing the cor-
porate alternative minimum tax imposed
by section 55) and 14401 (adding the base
erosion anti-abuse tax imposed by new
section 59A).
On August 20, 2018, the Treasury
Department and the IRS issued Revenue
Procedure 2018-40 (2018-34 I.R.B. 320),
which provided administrative procedures
for a taxpayer (other than a tax shelter
under section 448(d)(3)) meeting the re-
quirements of section 448(c) to obtain
consent to change the taxpayer’s method
of accounting to a method of accounting
permitted by section 263A, 448, 460, or
471, as amended by the TCJA under the
automatic change procedures of Revenue
Procedure 2015-13 (2015-5 I.R.B. 419),
as clarified and modified by Revenue Pro-
cedure 2015-33 (2015-24 I.R.B. 1067), as
modified by Revenue Procedure 2016-1
(2016-1 I.R.B. 1), and Revenue Proce-
dure 2017-59 (2017-48 I.R.B. 543). The
revenue procedure also invited comments
for future guidance regarding the imple-
mentation of the TCJA modifications to
sections 263A, 448, 460, and 471. Two
comments were received in response to
Revenue Procedure 2018-40 and are dis-
cussed in the Explanation of Provisions.
Finally, part 5 of the Explanation of
Provisions requests comments regarding
the effects of section 451(b) on the ap-
plication of section 460, 467, or another
special method of accounting, within the
meaning of section 451(b)(2). On Septem-
ber 9, 2019, the Treasury Department and
the IRS published proposed regulations
under section 451(b) (REG-104870-18)
in the Federal Register (84 FR 47191)
in which comments were requested on the
allocation of the transaction price for con-
tracts that include items of income subject
to section 451 and items of income that are
attributable to long-term contract activities
subject to section 460. One comment was
received in response to this request, but
was outside the scope of the rulemaking as
it was received after the expiration of the
comment period for REG-104870-18. As
discussed in part 5 of the Explanation of
Provisions, the Treasury Department and
the IRS have considered that comment in
requesting additional comments regarding
the application of sections 451(b)(2) and
451(b)(4) to a contract with income that
is accounted for in part under section 451
and in part under section 460, 467, or an-
other special method of accounting.
Explanation of Provisions
These proposed regulations provide
guidance under sections 263A, 448, 460,
and 471 to implement the TCJA’s amend-
ments to those provisions. These proposed
regulations also modify §§1.381(c)(5)-
1 and 1.446-1 to reflect these statutory
amendments.
1. Section 263A Small Business Taxpayer
Exemption
The uniform capitalization (UNICAP)
rules of section 263A provide that, in gen-
eral, the direct costs and the properly al-
locable share of the indirect costs of real
or tangible personal property produced, or
real or personal property described in sec-
tion 1221(a)(1) acquired for resale, cannot
be deducted but must either be capitalized
into the basis of the property or included
in inventory costs, as applicable. Certain
property is exempted from the capitaliza-
tion requirements of section 263A. For
example, section 263(A)(c)(4) provides
an exemption to the capitalization require-
ments of section 263A for any property
produced by a taxpayer pursuant to a long-
term contract.
In addition, certain taxpayers are ex-
empt from the capitalization requirements.
Prior to the enactment of the TCJA, sec-
tion 263A(b)(2)(B) and §1.263A-3(b)(1)
provided that resellers with average an-
nual gross receipts of $10,000,000 or less
were not subject to the capitalization re-
quirements (Section 263A small business
reseller exemption). Section 13102(b) of
the TCJA replaced the Section 263A small
reseller exemption with a new general
exemption from section 263A under new
section 263A(i) for small business taxpay-
ers (Section 263A small business taxpayer
exemption). The Section 263A small busi-
ness taxpayer exemption applies to any
taxpayer (other than a tax shelter under
section 448(a)(3)), meeting the gross re-
ceipts test of section 448(c), as amended
by section 13102(a) of the TCJA and ex-
plained in greater detail in part 2 of this
Explanation of Provisions (Section 448(c)
gross receipts test).
The proposed regulations remove
the now obsolete Section 263A small
reseller exemption provided in exist-

August 17, 2020 438 Bulletin No. 2020–34
ing §1.263A-3(a)(2)(ii) and (b). These
proposed regulations also modify exist-
ing §§1.263A-1, 1.263A-2, 1.263A-3,
1.263A-4, 1.263A-7, and 1.263A-8 to in-
corporate the Section 263A small business
taxpayer exemption.
A. Application of Section 448(c) Gross
Receipts Test to Taxpayers That Are Not
Corporations or Partnerships
For purposes of the Section 263A
small business taxpayer exemption, sec-
tion 263A(i)(2) provides that the Section
448(c) gross receipts test is applied in
the same manner as if each trade or busi-
ness of the taxpayer were a corporation
or partnership. Proposed §1.263A-1(j)
(2)(ii) provides that in the case of a tax-
payer other than a corporation or partner-
ship, the Section 448(c) gross receipts
test is applied by taking into account the
amount of gross receipts derived from
all trades or businesses of that taxpayer.
Under the proposed regulations, amounts
not related to a trade or business of that
taxpayer, such as inherently personal
amounts of an individual taxpayer, are
generally excluded from gross receipts.
Such excluded amounts include, in the
case of an individual, items such as So-
cial Security benefits, personal injury
awards and settlements, disability ben-
efits, and wages received as an employ-
ee that are reported on Form W-2. The
exclusion for wages does not extend to
guaranteed payments, which are not gen-
erally equivalent to salaries and wages.
See Revenue Ruling 69-184 (1969-1 CB
45). These proposed regulations imple-
menting the Section 263A small business
taxpayer exemption are consistent with
the proposed regulations implementing
the Section 460 small business taxpayer
exemption and Section 471 small busi-
ness taxpayer exemption discussed later
in this Explanation of Provisions, which
incorporate statutory language similar to
that in section 263A(i).
A commenter responding to Revenue
Procedure 2018-40 requested clarifica-
tion on the application of the Section
448(c) gross receipts test to individuals,
noting that it was unclear whether the
individual owner is required to include
the owner’s share of gross receipts from
pass-through entities in the individual’s
gross receipts. The commenter noted that
including such amounts in the individu-
al’s gross receipts would be distortive to
the individual’s other trades or business
reported on Schedules C, Profit or Loss
From Business, Schedule E, Supple-
mental Income and Loss, and Schedule
F, Profit or Loss From Farming, of the
Form 1040, U.S. Individual Income Tax
Return.
The Treasury Department and the
IRS note that section 263A(i) refers to
section 448(c), and section 448(c)(2) ex-
pressly requires the aggregation rules of
sections 52(a) or (b) and 414(m) or (o) to
apply. Thus, the aggregation rules under
section 52(a) or (b) or section 414(m) or
(o) will always apply in connection with
applying section 263A(i)(2). Under sec-
tion 52, an individual taxpayer with two
or more trades or businesses reported on
the individual’s Schedule C or Sched-
ule E of the individual’s Form 1040 is
required to aggregate the gross receipts
of those trades or businesses. Proposed
§1.263A-1(j)(2)(ii) is consistent with
these rules. Additionally, under section
263A(i)(2), each trade or business of the
taxpayer is treated as if it were a corpora-
tion or partnership, and it is well-estab-
lished under §1.448-1T(f) that a corpo-
ration or partnership includes in its gross
receipts all receipts that are properly
recognized under that corporation’s or
partnership’s accounting method in that
taxable year, regardless of the source of
the receipts. Since corporations and part-
nerships do not have inherently personal
items, the exclusion of such items from
the individual’s trade or business gross
receipts is not inconsistent with § 1.448-
1T(f)(2)(iv).
Consistent with section 263A(i), pro-
posed §1.263A-1(j)(2)(iii) provides that
when determining whether a taxpayer
qualifies for the Section 263A small busi-
ness taxpayer exemption, each partner in
a partnership includes a share of partner-
ship gross receipts in proportion to such
partner’s distributive share of items of
gross income that were taken into ac-
count by the partnership under section
703; similarly, each shareholder in an
S corporation includes a pro rata share of
the S corporation’s gross receipts taken
into account by the S corporation under
section 1363(b).
B. Removal of Small Reseller Exception
Prior to the TCJA, the Section 263A
small reseller exception in section 263A(b)
(2)(B) exempted from section 263A re-
sellers with gross receipts of $10 million
or less (small reseller gross receipts test).
The TCJA removed the Section 263A
small reseller exception provided in sec-
tion 263A(b)(2)(B).
Consistent with the TCJA, these
proposed regulations remove existing
§1.263A-3(a)(2)(ii) and modify existing
§1.263A-3(b) by removing the small re-
seller gross receipts test. The Treasury
Department and the IRS expect that most
taxpayers who previously satisfied the
small reseller gross receipts test will meet
the Section 448(c) gross receipts test due
to the increased dollar threshold in section
448(c), and therefore would be eligible to
apply the small business taxpayer exemp-
tion under section 263A(i).
The definition of gross receipts used
for the small reseller gross receipts test
under existing §1.263A-3(b) is applied for
purposes of other simplifying conventions
under the existing section 263A regula-
tions. Since the TCJA removed the small
reseller gross receipts test and added the
Section 263A small business taxpayer ex-
emption that refers to section 448(c), these
proposed regulations update those simpli-
fying conventions by cross referencing to
the definition of gross receipts set forth
in the proposed regulations under section
448 where applicable.
Specifically, proposed §1.263A-3(a)(5)
modifies the definition of gross receipts
that is used to determine whether a re-
seller has de minimis production activities
and proposed §1.263A-1(d)(3)(ii)(B)(1)
modifies the definition of gross receipts
used to permit certain taxpayers to use
the simplified production method under
§1.263A-2(b) by cross referencing to the
definition of “gross receipts” for purposes
of the Section 448(c) gross receipts test.
C. Changes to the Uniform Interest
Capitalization Rules
Prior to the TCJA, section 263A(f)
(1) required the capitalization of interest
if the taxpayer produced certain types
of property (designated property). The
Section 263A small business taxpayer

Bulletin No. 2020–34 439 August 17, 2020
exception applies for all purposes of sec-
tion 263A, including the requirement to
capitalize interest under section 263A(f).
Accordingly, these proposed regulations
modify §1.263A-7 and §1.263A-8 to add
new paragraphs to implement the Section
263A(i) small business taxpayer exemp-
tion for purposes of the requirement to
capitalize interest.
Additionally, existing §1.263A-9 con-
tains an election that permits taxpayers
whose average annual gross receipts do
not exceed $10 million to use the high-
est applicable Federal rate as a substitute
for the weighted average interest rate
when tracing debt. Again, the Section
263A small business taxpayer exception
applies for all purposes of section 263A,
including the election for small busi-
ness taxpayers who choose to capitalize
interest under section 263A(f). There-
fore, these proposed regulations modify
§1.263A-9 to remove the $10 million
gross receipts test in the definition of
eligible taxpayer and replace it with the
Section 448(c) gross receipts test. The
Treasury Department and the IRS have
determined that the use of a single gross
receipts test under the section 263A (oth-
er than the pre-existing higher $50 mil-
lion threshold for testing eligibility to
apply the simplified production method)
simplifies application of the UNICAP
rules for taxpayers.
D. Changes to §1.263A-4 for Farming
Trades or Businesses
Prior to the TCJA, section 263A(d)(3)
permitted certain taxpayers to elect not
to have the rules of section 263A apply
to certain plants produced in a farming
business conducted by the taxpayer. An
electing taxpayer and any related per-
son, as defined in §1.263A-4(d)(4)(iii),
are required to apply the alternative de-
preciation system, as defined in section
168(g)(2), to property used in the tax-
payer’s and any related persons’ farm-
ing business and placed in service in the
taxable years in which the election was
in effect.
The Treasury Department and the IRS
are aware that taxpayers that made an
election under section 263A(d)(3) may
also qualify for the Section 263A small
business taxpayer exemption, and may
prefer to apply that exemption rather
than the election under section 263A(d)
(3). Proposed §1.263A-4(d)(5) permits
a taxpayer to revoke its section 263A(d)
(3) election for any taxable year in which
the taxpayer is eligible for and wants to
apply the Section 263A small business
taxpayer exemption by following appli-
cable administrative guidance, such as
Revenue Procedure 2020-13 (2020-11
IRB 515). In addition, some taxpayers
may be eligible to apply the election
under section 263A(d)(3) in a taxable
year in which they cease to qualify for
the Section 263A small business tax-
payer exemption. Therefore, proposed
§1.263A-4(d)(6) permits such a taxpayer
to change its method of accounting from
the exemption under section 263A(i) by
making a section 263A(d)(3) election in
the same taxable year by following ap-
plicable administrative guidance, such as
Revenue Procedure 2020-13.
Proposed §1.263A-4(d)(3)(i) is mod-
ified to remove the requirement that the
election under section 263A(d)(3) by a
partnership or S corporation be made by
the partner, shareholder or member. The
Treasury Department and the IRS believe
that the inclusion of this requirement was
a drafting error, as sections 703(b) and
1363(c) require the election to be made at
the entity level.
The TCJA added new section 263A(d)
(2)(C), which provides a special tempo-
rary rule for citrus plants lost by reason
of casualty. The provision, which expires
in 2027, provides that section 263A does
not apply to replanting costs paid or in-
curred by a taxpayer other than the own-
er if certain conditions are met. Proposed
§1.263A-4(e)(5) is added to incorporate
this special temporary rule.
E. Costing Rules for Self-Constructed
Assets
One commenter stated that the cost-
ing rules for self-constructed property
used in a taxpayer’s trade or business
prior to the enactment of section 263A,
which would apply to small business
taxpayers choosing to apply the Sec-
tion 263A small business taxpayer ex-
emption, are not clear. The commenter
asked for clarification of what costs a
small business taxpayer is required to
capitalize to its depreciable property
if the taxpayer has chosen to apply the
Section 263A small business taxpayer
exemption. The Treasury Department
and the IRS request further comments
on specific clarifications needed re-
garding the costing rules that existed
prior to the enactment of the UNICAP
rules under section 263A.
2. Changes to the Regulations under
Section 448
Section 448(a) generally prohibits C
corporations, partnerships with a C cor-
poration as a partner, and tax shelters
from using the cash receipts and dis-
bursements method of accounting (cash
method). However, section 448(b)(3) pro-
vides that section 448(a) does not apply
to C corporations and partnerships with a
C corporation as a partner that meet the
Section 448(c) gross receipts test. Prior
to the TCJA’s enactment, a taxpayer met
the gross receipts test of section 448(c) if,
for all taxable years preceding the current
taxable year, the average annual gross re-
ceipts of the taxpayer (or any predecessor)
for any 3-taxable-year period did not ex-
ceed $5 million. If a taxpayer had not been
in existence for the entire 3-taxable-year
period, then the gross receipt test was
applied on the basis of the period during
which the taxpayer or trade or business
was in existence. For a taxable year less
than 12 months, the gross receipts of that
short taxable year were annualized (short
taxable year rule). Additionally, this gross
receipts test also required the aggregation
of gross receipts for all persons treated as
a single employer under section 52(a) or
(b) or section 414(m) or (o) (aggregation
rule).
Section 13102(a) of the TCJA amend-
ed the Section 448(c) gross receipts test to
permit a taxpayer (other than a tax shel-
ter) to meet the test if the taxpayer’s av-
erage annual gross receipts for the 3-tax-
able-year period ending with the year
preceding the current taxable year does
not exceed $25 million and indexed the
$25 million threshold for inflation (Sec-
tion 448 small business taxpayer exemp-
tion). Other rules in section 448(c), such
as the short taxable year rule and the ag-
gregation rule, were not altered by section
13102(a) of the TCJA.

August 17, 2020 440 Bulletin No. 2020–34
A. General rules of section 448(c) and
Section 448(c) gross receipts test
These proposed regulations modify ex-
isting §1.448-1 to clarify that it applies to
taxable years beginning before January 1,
2018 for purposes of applying the restric-
tions on the use of the cash method by C
corporations and partnerships with C cor-
poration partners. Proposed §1.448-2 pro-
vides rules applicable for taxable years
beginning after December 31, 2017. These
rules are generally similar to the existing
regulations under §1.448-1 and §1.448-1T
of the Temporary Income Tax Regulations,
including the short taxable year rule and
the aggregation rule. However, for taxable
years beginning after December 31, 2017,
the proposed regulations update the rules
to reflect the post-TCJA Section 448(c)
gross receipts test. These proposed regu-
lations also clarify that the gross receipts
of a C corporation partner are included in
the gross receipts of a partnership if the ag-
gregation rules apply to the C corporation
partner and the partnership.
The Treasury Department and the IRS
publish an annual revenue procedure for
inflation-adjusted amounts and intend
to include the inflation-adjusted section
448(c) dollar threshold in that revenue
procedure. See, for example, Revenue
Procedure 2019-44 (2019-47 IRB 1093).
B. Tax Shelters Defined in Section 448(d)
(3)
Under section 448(a)(3), a tax shelter
is prohibited from using the cash method.
Section 448(d)(3) cross references section
461(i)(3) to define the term “tax shelter.”
Section 461(i)(3)(B), in turn, includes a
cross reference to the definition of “syndi-
cate” in section 1256(e)(3)(B), which de-
fines a syndicate as a partnership or other
entity (other than a C corporation) if more
than 35 percent of the losses of that entity
during the taxable year are allocable to lim-
ited partners or limited entrepreneurs. Sec-
tion 1.448-1T(b)(3) narrowed this definition
by providing that a taxpayer is a syndicate
only if more than 35 percent of its losses
are allocated to limited partners or limited
entrepreneurs. Consequently, a partnership
or other entity (other than a C corporation)
may be considered a syndicate only for a
taxable year in which it has losses. These
proposed regulations adopt the same defi-
nition of syndicate provided in §1.448-1T.
One commenter expressed concern
that the definition of syndicate is difficult
to administer because many small busi-
ness taxpayers may fluctuate between
taxable income and loss between taxable
years, thus their status as tax shelters may
change each tax year. The commenter
suggested that the Treasury Department
and the IRS exercise regulatory authori-
ty under section 1256(e)(3)(C)(v) to pro-
vide that all the interests held in entities
that meet the definition of a syndicate but
otherwise meet the Section 448(c) gross
receipts test be deemed as held by individ-
uals who actively participate in the man-
agement of the entity, so long as the enti-
ties do not qualify to make an election as
an electing real property business or elect-
ing farm business under section 163(j)
(7)(B) or (C), respectively. The Treasury
Department and the IRS decline to adopt
this recommendation. The recommenda-
tion would allow a taxpayer that meets
the Section 448(c) gross receipts test to
completely bypass the “syndicate” portion
of the tax shelter definition under section
448(d)(3). Neither the statutory language
of section 448 nor the legislative history
of the TCJA support limiting the applica-
tion of the existing definition of tax shelter
in section 448(d)(3) in this manner.
The Treasury Department and the IRS
are aware of practical concerns regarding
the determination of tax shelter status for
the taxable year. For example, a taxpayer
may determine computationally that it is a
syndicate under section 1256 after the close
of the taxable year while preparing its Fed-
eral income tax return for the taxable year.
However, a taxpayer that is a tax shelter is
not permitted to use the cash method for
that taxable year, but may no longer be
able to timely file a Form 3115, Applica-
tion for Change in Accounting Method, to
change from the cash method to an appro-
priate method, such as an accrual method
of accounting (accrual method) for that
taxable year, or it may otherwise have time
constraints in filing its Federal income tax
return by the due date of the return (without
extensions) for such taxable year. While
these procedural constraints also existed
prior to the TCJA, the TCJA’s modifica-
tions to several other sections of the Code
to reference the section 448(d)(3) definition
of tax shelter made the tax shelter status
determination under section 448(c)(3) ap-
plicable to more taxpayers than prior to the
TCJA, increasing the number of taxpayers
affected by these procedural constraints.
In light of the increased relevance of
the definition of tax shelter under section
448(d)(3) after enactment of the TCJA,
proposed §1.448-2(b)(2)(iii)(B) permits
a taxpayer to elect to use the allocated
taxable income or loss of the immediate-
ly preceding taxable year to determine
whether the taxpayer is a syndicate for
purposes of section 448(d)(3) for the cur-
rent taxable year. A taxpayer that makes
this election will know at the beginning of
the taxable year whether it is a tax shel-
ter for the current taxable year, alleviating
concerns about the difficulties in timely
determining whether it is a tax shelter un-
der section 448(d)(3) and filing changes in
method of accounting, if necessary. A tax-
payer that makes this election must apply
the rule to all subsequent taxable years,
and for all purposes for which status as a
tax shelter under section 448(d)(3) is rel-
evant, unless the Commissioner permits a
revocation of the election.
Another commenter suggested a rule
to provide relief to taxpayers that report
negative taxable income in a taxable
year solely because of a negative section
481(a) adjustment arising from an ac-
counting method change and are conse-
quently within the definition of tax shelter
under section 448(d)(3), but that would
otherwise meet the Section 448(c) gross
receipts test. The suggested rule would
deem such taxpayers to not be tax shel-
ters for purposes of section 448(d)(3). The
Treasury Department and the IRS decline
to adopt this suggestion. No exception
was provided in the TCJA to limit the ap-
plication of the definition of tax shelter in
section 448(d)(3) for taxpayers making an
overall method change.
The Treasury Department and the IRS
continue to study the definition of tax
shelter under section 448(d)(3) and re-
quest comments on whether additional
relief is necessary.
C. Procedures for Taxpayers Required to
Change from the Cash Method
Prior to its amendment by the TCJA,
a taxpayer met the gross receipts test of

Bulletin No. 2020–34 441 August 17, 2020
section 448(c) if its average annual gross
receipts did not exceed $5 million for all
prior 3-taxable-year periods. Once a tax-
payer’s average annual gross receipts had
exceeded $5 million (first section 448
year), a taxpayer was prohibited under
section 448 from using the cash method
for all subsequent taxable years.
The TCJA removed the requirement
under section 448(c) that all prior tax-
able years of a taxpayer must satisfy the
Section 448(c) gross receipts test for the
taxpayer to qualify for the cash method
for taxable years beginning after Decem-
ber 31, 2017. Thus, section 448 no longer
permanently prevents a C corporation or a
partnership with a C corporation partner
from using the cash method for a year sub-
sequent to a taxable year in which its gross
receipts first exceed the dollar threshold
for the Section 448(c) gross receipts test.
Accordingly, the proposed regulations do
not require taxpayers to meet the gross
receipts test for all prior taxable years in
order to satisfy the Section 448(c) gross
receipts test.
The term “first section 448 year” used
in existing §1.448-1 no longer reflects
the statutory language of section 448 and
these proposed regulations remove this
term for taxable years beginning after De-
cember 31, 2017. Proposed §1.448-2(g)
(1) uses the term “mandatory section 448
year” to describe the first taxable year that
a taxpayer is prevented by section 448
from using the cash method, or a subse-
quent taxable year in which the taxpayer is
again prevented by section 448 from using
the cash method after previously making a
change in method of accounting that com-
plied with section 448.
Proposed §1.448-2(g)(3) requires a
taxpayer that meets the Section 448(c)
gross receipts test in the current taxable
year to obtain the written consent of the
Commissioner before changing to the
cash method if the taxpayer had previous-
ly changed its overall method from the
cash method during any of the five taxable
years ending with the current taxable year.
A taxpayer that makes multiple changes in
its overall method of accounting within a
short period of time may not be treating
items of income and expense consistent-
ly from year to year, and a change back
to the cash method within the five year
period may not clearly reflect income, as
required by §1.446-1(a)(2), even if section
448 otherwise does not prohibit the use of
the cash method.
The proposed regulations also do not
contain specific procedures to make a
method change from the cash method to a
permissible method. The Treasury Depart-
ment and the IRS have determined that
providing a single procedure in adminis-
trative guidance, such as Revenue Proce-
dure 2015-13 (or successor) and Revenue
Procedure 2019-43 (2019-48 IRB 1107)
(or successor) will reduce confusion for
taxpayers to make voluntary changes in
method of accounting to comply with
section 448. Consequently, the proposed
regulations provide that a taxpayer in a
mandatory section 448 year must follow
the applicable administrative procedures
to change from the cash method to a per-
missible method.
3. Changes to the Regulations under
Section 460
Section 460(a) provides that income
from a long-term contract must be de-
termined using the percentage-of-com-
pletion method (PCM). A long-term
contract is defined in section 460(f) as
generally any contract for the manu-
facture, building, installation, or con-
struction of property if such contract is
not completed within the taxable year
in which such contract is entered into.
Subject to special rules in section 460(b)
(3), section 460(b)(1)(A) generally pro-
vides that the percentage of completion
of a long-term contract is determined by
comparing costs allocated to the contract
under section 460(c) and incurred before
the close of the taxable year with the esti-
mated total contract costs. Section 460(b)
(1)(B) generally provides that a taxpayer
is required to pay or is entitled to receive
interest determined under the look-back
rules of section 460(b)(2) on the amount
of any tax liability under chapter 1 of the
Code that was deferred or accelerated
as a result of overestimating or under-
estimating total allocable contract costs
or contract price with respect to income
from long-term contracts reported un-
der the PCM. Section 56(a)(3) generally
provides that for alternative minimum
tax (AMT) purposes, the taxable income
from a long-term contract (other than a
home construction contract defined in
section 460(e)(5)(A)) is determined un-
der the PCM (as modified by section
460(b)).
Section 460(e)(1)(A) provides an ex-
emption from the requirement to use the
PCM for home construction contracts.
Prior to the TCJA, section 460(e)(1)(B)
provided a separate exemption from the
PCM for a long-term construction con-
tract of a taxpayer who estimated that
the contract would be completed within
the 2-year period from the commence-
ment of the contract (two-year rule), and
whose average annual gross receipts for
the 3-taxable-year period ending with the
year preceding the year the contract was
entered into did not exceed $10 million
(Section 460(e) gross receipts test). The
flush language of section 460(e)(1) pro-
vides that a home construction contract
with respect to which the two-year rule
and Section 460(e) gross receipts test are
not met will be subject to section 263A,
notwithstanding the general exemption
under section 263A(c)(4) for property
produced pursuant to a long-term contract
(large homebuilder rule). Additionally, for
AMT purposes, section 56(a)(3) provides
in the case of contract described in section
460(e)(1), other than a home construction
contract, the percentage of the contract
completed is determined under section
460(b)(1) by using the simplified proce-
dures for allocation of costs prescribed
under section 460(b)(3).
Section 13102(d) of the TCJA amend-
ed section 460(e)(1)(B) by removing the
Section 460(e) gross receipts test and re-
placing it with the Section 448(c) gross
receipts test, as amended by section
13102(a) of the TCJA, for the taxable
year in which the contract is entered into.
Thus, section 460(e)(1)(B), as modified
by TCJA, provides a small contractor
exemption for long-term construction
contracts of a taxpayer other than a tax
shelter that estimates that the contract
will be completed within two years of the
commencement of the contract and meets
the Section 448(c) gross receipts test
(Section 460 small contractor exemp-
tion). The Section 460 small contractor
exemption. does not apply to home con-
struction contracts, which remain exempt
from required use of PCM under section
460(e)(1)(A).

August 17, 2020 442 Bulletin No. 2020–34
A. Application of the Section 448(c)
Gross Receipts Test and Rules Applicable
to Taxpayers Other Than a Corporation or
Partnership
Proposed §1.460-3(b) modifies the
rules relating to the small contractor ex-
emption by incorporating the requirement
in section 460(e)(1)(B)(ii) that an eligible
taxpayer must meet the Section 448(c)
gross receipts test for the taxable year in
which the contract is entered into.
Section 460(e)(2), which has statu-
tory language identical to that in section
263A(i)(2), provides that for a taxpayer
that is not a corporation or partnership, the
Section 448(c) gross receipts test is ap-
plied in the same manner as if each trade
or business of the taxpayer were a corpo-
ration or a partnership. Proposed §1.460-
3(b)(3)(ii)(A) through (D) provide guid-
ance under section 460(e)(2) consistent
with the rules in proposed §1.263A-1(j)
(2).
B. Home Construction Contract Rules
The large homebuilder rule under sec-
tion 460(e)(1) exempts home construc-
tion contracts from PCM but requires
capitalization of costs under the UNI-
CAP rules under section 263A. Consis-
tent with section 460(e)(1), proposed
§1.460-5(d)(3) provides that a taxpayer
must capitalize the costs of home con-
struction contracts under section 263A
and the regulations under section 263A,
unless the taxpayer estimates, when en-
tering into the contract, that it will be
completed within two years of the con-
tract commencement date and the tax-
payer satisfies the Section 448(c) gross
receipts test for the taxable year in which
the contract is entered into.
C. Clarification of Method of Accounting
Rules
Section 460(e)(2)(B) provides that any
change in method of accounting made
pursuant to section 460(e)(1)(B)(ii) is
treated as initiated by the taxpayer and
made with the consent of the Secretary of
the Treasury or his delegate (Secretary).
The change is made on a cut-off basis for
all similarly classified contracts entered
into on or after the year of change.
Revenue Ruling 92-28 (92-1 CB 153)
held that within the same trade or busi-
ness, a taxpayer may use different methods
of accounting for contracts exempt under
section 460(e)(1) and contracts subject
to mandatory use of PCM under section
460(a). Accordingly, a taxpayer with both
exempt contracts and nonexempt contracts
within the same trade or business may use
a method of accounting other than PCM
for all exempt contracts, even though the
taxpayer would be required to use PCM
for the nonexempt contracts.
A commenter requested clarification on
the interaction of Revenue Ruling 92-28
with section 460(e)(2)(B). The comment-
er asked for clarification because Reve-
nue Ruling 92-28 describes situations in
which a taxpayer is not required to obtain
consent to a change in method of account-
ing because it is either adopting a method
of accounting for a new item (Situation 1:
PCM for nonexempt long-term contracts)
or returning to the use of a previously
adopted method (Situation 2: completed
contract method for contracts exempt be-
cause taxpayer’s average annual gross re-
ceipts have fallen below the threshold for
the small contractor exemption).
The Treasury Department and the IRS
have determined that the holding in Rev-
enue Ruling 92-28 remains correct, and
that section 460(e)(2)(B) does not apply
to Situations 1 and 2 in Revenue Ruling
92-28. In reconciling the statutory lan-
guage of section 460(e)(2)(B) with section
446, the Treasury Department and the IRS
interpret section 460(e)(2)(B) as apply-
ing to situations in which a taxpayer has
been using PCM for exempt contracts and
would like to change to a different exempt
contract method. Accordingly, proposed
§1.460-1(f)(3) incorporates the holding of
Revenue Ruling 92-28 and provides that a
taxpayer may adopt any permissible meth-
od of accounting for each classification of
contract (that is, exempt and nonexempt).
D. Look-Back Rules
Section 460(b) provides that, upon the
completion of any long-term contract, the
look-back method is applied to amounts
reported under the contract using PCM,
whether for regular income tax purposes
or for AMT purposes. Under the look-back
method, taxpayers are required to pay in-
terest if the taxpayer’s Federal income tax
liability is deferred as a result of underes-
timating the total contract price or overes-
timating total contract costs. Alternatively,
a taxpayer is entitled to receive interest if
the taxpayer’s Federal income tax liability
has been accelerated as a result of overes-
timating the total contract price or under-
estimating total contract costs. Any inter-
est to be paid is based on a comparison of
the difference between the Federal income
tax liability actually reported by the tax-
payer compared to the Federal income tax
liability that would have been reported if
the taxpayer had used actual contract pric-
es and costs instead of estimated contract
prices and costs in computing income un-
der PCM.
i. Look-Back Rules and AMT
Section 12001 of the TCJA amended
section 55(a) so that the AMT is no longer
imposed on corporations for taxable years
beginning after December 31, 2017. Con-
sistent with section 12001 of the TCJA,
proposed §1.460-6(c) reflects the changes
to section 55(a) by providing that in ap-
plying the look-back method, alternative
minimum taxable income is redetermined
only for taxable years in which the AMT
is applicable. Similarly, the recomputed
tax liability for prior contract years in-
cludes the AMT only for the taxable years
in which the AMT is applicable. Conse-
quently, for taxable years beginning after
December 31, 2017, for purposes of the
look-back method, a corporation will not
redetermine alternative minimum taxable
income or recompute AMT liability. How-
ever, a corporation that has a contract that
spans a period beginning before the TCJA
(taxable years beginning before January
1, 2018) and ending after the TCJA (tax-
able years beginning after December 31,
2017), would be required to redetermine
alternative minimum taxable income and
recompute AMT for those taxable years
beginning before January 1, 2018.
ii. De Minimis Exception to Look-Back
Rules
Section 460(b)(3) provides an excep-
tion to the requirement to apply the look-
back method. Under the exception, the
look-back method need not be applied

Bulletin No. 2020–34 443 August 17, 2020
if the contract price does not exceed the
lesser of $1,000,000 or one percent of the
taxpayer’s average annual gross receipts
for the prior 3-taxable-year period ending
with the year preceding the taxable year in
which the contract is completed, and the
contract is completed within two years of
the commencement of the contract. Pro-
posed §1.460-3(b)(3) provides that, for
purposes of this de minimis exception,
gross receipts are determined in accor-
dance with the regulations under section
448(c).
iii. Look-Back Rules and the BEAT
Proposed §1.460-6 is also updated to
reflect the enactment of the base erosion
anti-abuse tax (BEAT) imposed by sec-
tion 59A. For any taxable year, the BEAT
is a tax on each applicable taxpayer (see
§1.59A-2) equal to the base erosion mini-
mum tax amount (BEMTA) for that year.
Generally, the taxpayer’s BEMTA equals
the excess of (1) the applicable tax rate for
the taxable year (BEAT rate) multiplied
by the taxpayer’s modified taxable income
under §1.59A-3(b) for the taxable year
over (2) the taxpayer’s adjusted regular
Federal income tax liability for that year.
Proposed §1.460-6 applies the look-
back method to re-determine the taxpay-
er’s modified taxable income under §1.59-
3(b) and the taxpayer’s BEMTA for the
taxable year. Specifically, the taxpayer
must determine its modified taxable in-
come and BEMTA for each year prior to
the filing year that is affected by contracts
completed or adjusted in the filing year as
if the actual total contract price and costs
had been used in applying the percentage
of completion method.
The Treasury Department and the
IRS have proposed this rule because the
income from long-term contracts deter-
mined using the PCM may be overes-
timated or underestimated, which may
change the taxpayer’s modified taxable
income or BETMA, or whether or not a
taxpayer is an applicable taxpayer in a
particular taxable year. Clarifying in the
regulations under section 460 that the
look-back method must take into account
any application of the BEAT makes clear
that section 460 provides taxpayers will
pay or receive interest (whichever is the
case) if their Federal income tax liability,
including any BEAT liability, is deferred,
eliminated, understated, or overstated as a
result of the taxpayer’s estimation of the
total contract price or total contract costs.
4. Section 471 Small Business Taxpayer
Exemption
Section 471(a) requires inventories to
be taken by a taxpayer when, in the opin-
ion of the Secretary, taking an inventory
is necessary to determine the income of
the taxpayer. Section 1.471-1 requires the
taking of an inventory at the beginning
and end of each taxable year in which the
production, purchase, or sale of merchan-
dise is an income-producing factor. Ad-
ditionally, when an inventory is required
to be taken, §1.446-1(c)(1)(iv) and (c)(2)
require that an accrual method be used for
purchases and sales.
Section 13102(c) of the TCJA added
new section 471(c) to remove the statuto-
ry requirement to take an inventory when
the production, purchase, or sale of mer-
chandise is an income-producing factor
for a taxpayer (other than a tax shelter)
meeting the Section 448(c) gross receipts
test (Section 471 small business taxpayer
exemption). The Section 471 small busi-
ness taxpayer exemption provides that
the requirements of section 471(a) do not
apply to a taxpayer for that taxable year,
and the taxpayer’s method of accounting
for inventory for such taxable year shall
not be treated as failing to clearly reflect
income if the taxpayer either: (1) treats
the taxpayer’s inventory as non-incidental
materials and supplies, or (2) conforms
the taxpayer’s inventory method to the
taxpayer’s method of accounting for in-
ventory reflected in an applicable financial
statement as defined in section 451(b)(3)
(AFS), or if the taxpayer does not have an
AFS, in the taxpayer’s books and records
prepared in accordance with the taxpay-
er’s accounting procedures.
Section 471(c)(3) provides that in the
case of a taxpayer that is not a corporation
or partnership, the Section 448(c) gross
receipts test is determined in the same
manner as if each trade or business of
such taxpayer were a corporation or part-
nership.
A taxpayer’s method of accounting for
inventory may not clearly reflect income
if a taxpayer meets the Section 448(c)
gross receipts test but does not take an in-
ventory, and also does not either treat its
inventory as non-incidental materials and
supplies or in conformity with its AFS, or
its books and records if it does not have an
AFS. In such instances, the general rules
under section 446 for analyzing whether
a method of accounting clearly reflects in-
come are applicable.
These proposed regulations modify
existing §1.471-1 by adding proposed
§1.471-1(b) to implement the Section
471 small business taxpayer exemption
under section 471(c). Proposed §1.471-
1(b) provides guidance on the application
of the Section 448(c) gross receipts test
to taxpayers other than a corporation or
partnership, the treatment of inventory as
non-incidental materials and supplies, and
the conforming of inventory to an AFS or
the taxpayer’s books and records.
A. Application of the Section 448(c)
Gross Receipts Test to Taxpayers Other
Than a Corporation or Partnership
These proposed regulations provide
guidance under section 471(c)(3), which
has statutory language identical to sec-
tion 263A(i)(2), consistent with the rules
in proposed §1.263A-1(j)(2). See part 1.A
of this Explanation of Provisions for dis-
cussion of the application of the Section
448(c) gross receipts test to individuals
and other taxpayers that are not a corpora-
tion or partnership.
B. Treatment of Inventory as Non-
Incidental Materials and Supplies
Section 471(c)(1)(B)(i) provides that
a taxpayer, other than a tax shelter, that
meets the Section 448(c) gross receipts
test can treat its inventory as non-inciden-
tal materials and supplies.
Prior to the TCJA, the Treasury Depart-
ment and the IRS provided administrative
relief for certain taxpayers from the re-
quirements of section 471(a) with regard
to purchases and sales of inventory. Un-
der Revenue Procedure 2001-10 (2001-2
IRB 272), a taxpayer with average annual
gross receipts that did not exceed $1 mil-
lion was exempted from the requirements
to use an accrual method under section
446 and to account for inventories under
section 471. Similarly, under Revenue

August 17, 2020 444 Bulletin No. 2020–34
Procedure 2002-28 (2002-28 IRB 815), a
“qualifying small business taxpayer,” as
defined in section 4.01 of Revenue Proce-
dure 2002-28, was also exempted from the
requirements to use an accrual method un-
der section 446 and to account for inven-
tories under section 471. To qualify, a tax-
payer must have had average annual gross
receipts that did not exceed $10 million
in certain industries, or reasonably deter-
mined that its principal business activity
was the provision of services, or reason-
ably determined its principal business ac-
tivity was the fabrication or modification
of customized tangible personal property.
Under both revenue procedures, a tax-
payer was permitted to account for its
inventory in the same manner as non-in-
cidental materials and supplies under
§1.162-3. Under § 1.162-3, materials and
supplies that are not incidental are deduct-
ible only in the year in which they are actu-
ally consumed and used in the taxpayer’s
business. For purposes of these revenue
procedures, inventoriable items treated
as non-incidental materials and supplies
were treated as consumed and used in the
taxable year the taxpayer provided the
items to a customer. Thus, the costs of
such inventoriable items were recovered
by a cash basis taxpayer only in that year,
or in the year in which the taxpayer ac-
tually paid for the goods, whichever was
later. See section 4.02 of Revenue Proce-
dure 2001-10 and section 4.05 of Revenue
Procedure 2002-28.
Section 471(c)(1)(B)(i) generally cod-
ified the treatment of inventory using the
non-incidental materials and supplies
method of accounting described in Reve-
nue Procedure 2001-10 and Revenue Pro-
cedure 2002-28, with certain exceptions.
Accordingly, proposed §1.471-1(b)(4)
provides rules similar to the provisions of
these revenue procedures, including that
the items continue to be inventory prop-
erty. The proposed regulations refer to
inventory treated as non-incidental mate-
rials and supplies as “section 471(c) mate-
rials and supplies.”
i. Definition of the Term “Used and
Consumed”
As explained previously and as noted
in the Conference Report to the TCJA,
an exception to the requirement to take
an inventory was provided under Rev-
enue Procedure 2001-10 and Revenue
Procedure 2002-28. H.R. Rep. No. 115-
466, at 378 fn. 638 and 639 (2017). Un-
der that exception, a taxpayer was able
to account for inventory as materials and
supplies that are not incidental. The cost
of non-incidental materials and supplies
is deductible in the taxable year in which
the materials and supplies are first used
or consumed in the taxpayer’s operations.
Id. at 378 fn. 640. As discussed in part
4.B of this Explanation of Provisions, the
administrative guidance as in existence
prior to the TCJA provided that inven-
tory treated as non-incidental materials
and supplies under §1.162-3 remained
inventory property, the cost of which was
recovered by a cash basis taxpayer when
the items were provided to a customer,
or when the taxpayer paid for the items,
whichever was later. The Conference
Report describes the TCJA as generally
permitting the costs of non-incidental
materials and supplies to be recovered
in the taxable year that is “consistent
with present law.” Id. at 380 fn. 657.
The Treasury Department and IRS inter-
pret section 471(c)(1)(B)(i) as generally
codifying the administrative guidance
existing at the time of enactment (that
is, Revenue Procedure 2001-10 and Rev-
enue Procedure 2002-28). Accordingly,
proposed §1.471-1(b)(4)(i) provides that
section 471(c) materials and supplies are
used or consumed in the taxable year in
which the taxpayer provides the item to a
customer and the cost of such item is re-
covered in that year or the taxable year in
which the taxpayer pays for or incurs (in
the case of an accrual method taxpayer)
such cost, whichever is later.
One commenter requested that raw ma-
terials used in the production of finished
goods be deemed “used or consumed”
when the raw material is used during
production instead of when the finished
product is provided to a customer. Under
this approach, a producer would be able
to recover production costs earlier than
allowed under the administrative guid-
ance of Revenue Procedure 2001-10 and
Revenue Procedure 2002-28. Further,
under this approach, a producer would
be permitted to recover costs earlier than
a reseller. The Treasury Department and
the IRS decline to adopt this suggestion.
As discussed previously, the Treasury
Department and the IRS interpret section
471(c)(1)(B)(i) and its legislative history
generally as codifying the rules provided
in the administrative guidance existing
at the time the Act was enacted. Accord-
ingly, proposed §1.471-1(b)(4) provides
that section 471(c) materials and supplies
are “used and consumed” in the taxable
year the taxpayer provides the goods to
a customer, and that the cost of goods is
recovered in that year or the taxable year
in which such cost is paid or incurred (in
accordance with the taxpayer’s method of
accounting), whichever is later.
ii. De Minimis Safe Harbor under
§1.263(a)-1(f)
Section 1.263(a)-1(f) provides a reg-
ulatory de minimis safe harbor election
through which an electing taxpayer may
choose not to treat as a material or sup-
ply under §1.162-3(a) any amount paid
in the taxable year for tangible property
if the amount paid meets certain require-
ments, and instead to deduct the de mini-
mis amount in accordance with its AFS, or
books and records, if the taxpayer has no
AFS. Section 1.263(a)-1(f)(2)(i) provides
that the de minimis safe harbor election
does not apply to amounts paid for prop-
erty that is or is intended to be included in
inventory property.
Two commenters asked for clarifi-
cation on whether a taxpayer using the
non-incidental materials and supplies
method under section 471(c)(1)(B)(i) may
use the de minimis safe harbor election of
§1.263(a)-1(f). As discussed in part 4.B of
this Explanation of Provisions, the Trea-
sury Department and the IRS continue to
interpret inventory treated as non-inci-
dental materials and supplies as remain-
ing characterized as inventory property.
Consequently, proposed §1.471-1(b)(4)
(i) provides that inventory treated as sec-
tion 471(c) non-incidental materials and
supplies is not eligible for the de minimis
safe harbor election under §1.263(a)-1(f).
Extending the regulatory election un-
der §1.263(a)-1(f) to encompass section
471(c) materials and supplies is outside
the intended scope of the election and runs
counter to section 471(c), which indicates
section 471(c) materials and supplies are
inventory property.

Bulletin No. 2020–34 445 August 17, 2020
iii. Identification and Valuation of Section
471(c) Materials and Supplies
One commenter asked for guidance
on how a taxpayer determines the cost
basis of inventory items that are treated
as non-incidental materials and supplies.
Proposed §1.471-1(b)(4)(ii) provides
guidance on how a taxpayer may identi-
fy and value section 471(c) materials and
supplies. These identification and valu-
ation methods would apply whether the
taxpayer used the cash method or an ac-
crual method.
Consistent with Revenue Procedure
2002-28, and the legislative history to sec-
tion 471(c), proposed §1.471-1(b)(4)(ii)
permits taxpayers to determine the amount
of their section 471(c) materials and sup-
plies by using either a specific identifi-
cation method, a first-in, first-out (FIFO)
method, or an average cost method, pro-
vided that the method is used consistently.
Taxpayers may not identify their invento-
ry using a last-in, first-out (LIFO) meth-
od or value section 471(c) materials and
supplies using a lower-of-cost-or-market
(LCM) method. The Treasury Department
and the IRS are aware that the purpose of
the section 471(c) materials and supplies
method is to provide simplification. Ac-
counting methods using LIFO and LCM
require sophisticated computations and
are allowed under the more complex in-
ventory rules of sections 471(a) and 472.
Accordingly, these proposed regulations
do not permit a taxpayer using the sec-
tion 471(c) materials and supplies method
to use either a LIFO method or the LCM
method.
iv. Direct Labor and Overhead Costs for
Section 471(c) Materials and Supplies
Commenters asked for clarification as
to the treatment of direct labor and over-
head costs for section 471(c) materials
and supplies. Revenue Procedure 2001-
10 and Revenue Procedure 2002-28 did
not directly address whether direct labor
and overhead costs for inventory treat-
ed as non-incidental materials and sup-
plies were immediately deductible. The
commenters argue that if inventories are
treated as non-incidental materials and
supplies, then all of the direct labor and
overhead costs incurred in producing the
goods are deductible when incurred. One
commenter noted that prior to the enact-
ment of section 263A, the costing rules for
inventoriable goods produced by a taxpay-
er were governed by the full absorption
method under §1.471-11, and §1.471-3, in
the case of a reseller of inventory.
The Treasury Department and the IRS
have determined that under the section
471(c) materials and supplies method, the
items retain their character as inventory
property. Because the property remains
characterized as inventory property, the
costing rules in §1.471-11 and §1.471-3
are the applicable rules to determine which
costs are to be included under the sec-
tion 471(c) materials and supplies meth-
od. However, the Treasury Department
and the IRS are aware that the purpose
of section 471(c)(1)(A)(i) is to provide
simplification for taxpayers. Accordingly,
these proposed regulations provide that a
taxpayer using the section 471(c) mate-
rials and supplies method is required to
include only direct costs paid to produce
or acquire the inventory treated as sec-
tion 471(c) materials and supplies. These
direct costs are not immediately deduct-
ible but are recovered in accordance with
proposed §1.471-1(b)(4). Consistent with
existing law, these proposed regulations
provide that a taxpayer is not permitted
to recover a cost that it otherwise would
be neither permitted to recover nor deduct
for Federal income tax purposes solely by
reason of it being included in the costs of
section 471(c) materials and supplies.
C. Treatment of Inventory for an AFS
Taxpayer
A taxpayer, other than a tax shelter,
that meets the Section 448(c) gross re-
ceipts test need not take an inventory un-
der section 471(a) and may choose to treat
its inventory as the inventory is reflected
in the taxpayer’s AFS, or if the taxpayer
does not have an AFS, as the invento-
ry is treated in the taxpayer’s books and
records prepared in accordance with the
taxpayer’s accounting procedures. These
proposed regulations provide guidance
on the definition of AFS, the types and
amounts of costs reflected in an AFS that
can be recovered under section 471(c),
and when such costs may be taken into
account. The proposed regulations use
the term “AFS section 471(c) method” to
describe the permissible section 471(c)(1)
(B)(ii) method for a taxpayer with an AFS
(AFS taxpayer).
i. Definition of AFS
Section 471(c)(2) defines an AFS by
cross-reference to section 451(b)(3).
Consistent with the statute, proposed
§1.471-1(b)(5)(ii) defines the term AFS
in accordance with section 451(b)(3), and
incorporates the definition provided in
proposed §1.451-3(c)(1). The rules relat-
ing to additional AFS issues provided in
§1.451-3(h) also apply to the AFS section
471(c) method. The proposed regulations
also provide that a taxpayer has an AFS
for the taxable year if all of the taxpayer’s
taxable year is covered by an AFS.
If a taxpayer’s AFS is prepared on the
basis of a financial accounting year that
differs from the taxpayer’s taxable year,
proposed §1.471-1(b)(5)(ii) provides that
a taxpayer determines its inventory for the
mismatched reportable period by using a
method of accounting described in pro-
posed §1.451-3(h)(4). The Treasury De-
partment and the IRS propose to require
a taxpayer with an AFS that uses the AFS
section 471(c) method to consistently ap-
ply the same mismatched reportable period
method provided in proposed §1.451-3(h)
(4) for purposes of its AFS section 471(c)
method of accounting that is used for sec-
tion 451. The Treasury Department and
the IRS request comments on the consis-
tency requirement and other issues related
to the application of proposed §1.451-3(h)
to the AFS section 471(c) method.
ii. Types and Amounts of Costs Reflected
in an AFS
Proposed §1.471-1(b)(5) provides rules
relating to the AFS section 471(c) method,
including a description of the costs includ-
ed in this method. The proposed regula-
tions provide that an AFS taxpayer, other
than a tax shelter, that meets the Section
448(c) gross receipts test may use the AFS
section 471(c) method to account for its
inventory costs for that taxable year. The
proposed regulations also clarify that a
taxpayer using the AFS section 471(c)
method is maintaining inventory, but gen-
erally recovers the costs of inventory in

August 17, 2020 446 Bulletin No. 2020–34
accordance with its AFS inventory meth-
od and not by using an inventory method
specified under section 471(a) and the reg-
ulations under section 471.
Under the AFS section 471(c) method,
the term “inventory costs” means the costs
that a taxpayer capitalizes to property pro-
duced or property acquired for resale in
its AFS. However, these proposed regu-
lations clarify that the amount of an in-
ventory cost in a taxpayer’s AFS may not
properly reflect the amount recoverable
under the taxpayer’s AFS section 471(c)
method. These proposed regulations pro-
vide that a taxpayer is not permitted to
recover a cost that it otherwise would be
neither permitted to recover nor deduct
for Federal income tax purposes solely
by reason of it being an inventory cost
in the taxpayer’s AFS inventory method.
In addition, these proposed regulations
provide that a taxpayer may not capital-
ize a cost to inventory any earlier than the
taxable year in which the amount is paid
or incurred under the taxpayer’s overall
method of accounting for Federal income
tax purposes (for example, if applicable,
section 461(h) is met) or not permitted to
be capitalized by another Code provision
(for example, section 263(a)). As a result,
a taxpayer may be required to reconcile
any differences between its AFS and Fed-
eral income tax return treatment (book-tax
adjustments) for all or a portion of a cost
that was included in the taxpayer’s AFS
inventory method under the AFS section
471(c) method.
The Treasury Department and the IRS
are aware that some taxpayers may inter-
pret section 471(c)(1)(B)(ii) as permitting
a taxpayer to capitalize a cost to inventory
for Federal income tax purposes when that
cost is included in the taxpayer’s AFS in-
ventory method irrespective of: (1) wheth-
er the amount is deductible or otherwise
recoverable for Federal income tax pur-
poses; or (2) when the amount is capitaliz-
able under the taxpayer’s overall method
of accounting used for Federal income tax
purposes. The Treasury Department and
the IRS do not agree with this interpreta-
tion because section 471 is a timing pro-
vision. Section 471 is in subchapter E of
chapter 1, Accounting Periods and Meth-
ods of Accounting. It is not in subchapter
B of chapter 1, Computation of Taxable
Income. A method of accounting deter-
mines when an item of income or expense
is recognized, not whether it is deductible
or recoverable through cost of goods sold
or basis.
Accordingly, the Treasury Department
and the IRS view section 471(c)(1)(B)(ii)
as an exemption from taking an inventory
under section 471(a) for certain taxpayers
that meet the Section 448(c) gross receipts
test and not as an exemption from the ap-
plication of Code provisions other than
section 471(a). While Congress provided
an exemption from the general inventory
timing rules of section 471(a), Congress
did not exempt these taxpayers from ap-
plying other Code provisions that deter-
mine the deductibility or recoverability
of costs, or the timing of when costs are
considered paid or incurred. For example,
Congress did not modify or alter section
461 regarding when a liability is taken
into account, or any of the provisions that
disallow a deduction, in whole or in part,
such as any disallowance under section
274, to exempt these taxpayers. Accord-
ingly, these proposed regulations require
an AFS taxpayer that uses the AFS section
471(c) method to make book-tax adjust-
ments for costs capitalized in its AFS that
are not deductible or otherwise recover-
able, in whole or in part, for Federal in-
come tax purposes or that are taken into
account in a taxable year different than the
year capitalized under the AFS as a result
of another Code provision.
D. Treatment of Inventory by Taxpayers
Without an AFS
Under section 471(c)(1)(B)(ii), a tax-
payer, other than a tax shelter, that does
not have an AFS and that meets the Section
448(c) gross receipts test is not required
to take an inventory under section 471(a),
and may choose to treat its inventory as
reflected in the taxpayer’s books and re-
cords prepared in accordance with the tax-
payer’s accounting procedures (non-AFS
section 471(c) method). These proposed
regulations permit a taxpayer without an
AFS (non-AFS taxpayer) to follow its
method of accounting for inventory used
in its books and records that properly re-
flect its business activities for non-Federal
income tax purposes. The proposed reg-
ulations clarify that a non-AFS taxpayer
using the non-AFS section 471(c) method
has inventory, but recovers the costs of
inventory through its book method, rather
than through an inventory method under
section 471(a) and the regulations under
section 471.
Two comments received requested a
definition of “books and records of the
taxpayer prepared in accordance with the
taxpayer’s accounting procedures.” The
Treasury Department and the IRS decline
to define books and records in these pro-
posed regulations. It is well-established
under existing law that the books and re-
cords of a taxpayer comprise the totality
of the taxpayer’s documents and electron-
ically-stored data. See, for example, Unit-
ed States v. Euge, 444 U.S. 707 (1980).
See also Digby v. Comm’r, 103 T.C. 441
(1994), and §1.6001-1(a). A comment-
er specifically asked for clarification on
whether books and records of the taxpay-
er include the accountant’s workpapers
(whether recorded on paper, electronically
or on other media). The Treasury Depart-
ment and the IRS note that under exist-
ing law, these workpapers are generally
considered part of the books and records
of the taxpayer. United States v. Arthur
Young & Co., 465 U.S. 805 (1984).
The Treasury and the IRS interpret sec-
tion 471(c)(1)(B)(ii) as a simplification of
the inventory accounting rules in section
471(a) for certain small business taxpay-
ers. Proposed §1.471-1(b)(6)(i) provides
that under the non-AFS section 471(c)
method, a taxpayer recovers the costs of
inventory in accordance with the method
used in its books and records and not by
using an inventory method specified under
section 471(a) and regulations under 471.
A books and records method that deter-
mines ending inventory and cost of goods
sold that properly reflects the taxpayer’s
business activities for non-Federal income
tax purposes is to be used under the tax-
payer’s non-AFS section 471(a) method.
For example, a taxpayer that performs a
physical count that is used in determining
inventory in the taxpayer’s books and re-
cords must use that count for purposes of
the non-AFS section 471 method.
Consistent with the rules applicable to
AFS taxpayers, proposed §1.471-1(b)(6)
(ii) clarifies that a non-AFS taxpayer is
not permitted to recover a cost that it oth-
erwise would not be permitted to recover
or deduct for Federal income tax purposes

Bulletin No. 2020–34 447 August 17, 2020
solely by reason of it being an inventory
cost in the taxpayer’s non-AFS invento-
ry method. These proposed regulations
provide that a taxpayer may not capital-
ize a cost to inventory any earlier than the
taxable year in which the amount is paid
or incurred under the taxpayer’s overall
method of accounting for Federal income
tax purposes (for example, if applicable,
section 461(h) is met) or not permitted to
be capitalized by another Code provision
(for example, section 263(a)). See section
4.C.ii of this Explanation of Provisions.
5. Section 451 Allocation of Transaction
Price
As noted in the Background section
of this preamble, section 13221(a) of the
TCJA added a new section 451(b) to the
Code effective for taxable years beginning
after December 31, 2017. This provision
provides that, for an accrual method tax-
payer with an AFS, the all events test with
respect to any item of gross income (or
portion thereof) is not treated as met any
later than when the item (or portion there-
of) is included in revenue for financial
accounting purposes on an AFS. Section
451(b)(1)(A) sets forth the general AFS
Income Inclusion Rule, providing that, for
an accrual method taxpayer with an AFS,
the all events test with respect to an item
of gross income, or portion thereof, is met
no later than when the item, or portion
thereof, is included as revenue in an AFS
(AFS Income Inclusion Rule). However,
section 451(b)(2) provides that the AFS
Income Inclusion Rule does not apply
with respect to any item of gross income
the recognition of which is determined us-
ing a special method of accounting, “other
than any provision of part V of subchap-
ter P (except as provided in clause (ii) of
paragraph (1)(B)).” In addition, section
451(b)(4) provides that for purposes of
section 451(b), in the case of a contract
which contains multiple performance
obligations, the allocation of the transac-
tion price to each performance obligation
is equal to the amount allocated to each
performance obligation for purposes of
including such item in revenue in the tax-
payer’s AFS. Additionally, section 451(c)
(4)(D), which provides rules for allocating
payments to each performance obligation
for purposes of applying the advance pay-
ment rules under section 451(c), provides
that for purposes of section 451(c), “rules
similar to section 451(b)(4) shall apply.”
The preamble to the proposed regula-
tions under section 451(b) contained in
REG-104870-18 (84 FR 47191) requested
comments on the allocation of transaction
price for contracts that include both in-
come subject to section 451 and income
subject to a special method of accounting
provision (specifically section 460). One
commenter suggested that the allocation
provisions under section 460 and the regu-
lations thereunder, and not section 451(b)
(4), should control the amount of gross
income from a long-term contract that
is accounted for under section 460. The
commenter notes that using this approach
is appropriate in light of section 451(b)
(2), which reflects Congress’s intent to
not disturb the treatment of amounts for
which a taxpayer uses a special method of
accounting. The preamble to the proposed
regulations under section 451(c) contained
in REG-104554-18 (84 FR 47175) also in-
cluded a similar request for comments for
advance payment purposes; however, no
comments were received in response to
this request.
In light of the comment in the preced-
ing paragraph and the questions received
from taxpayers and practitioners regard-
ing this issue in the context of other spe-
cial methods of accounting (for example,
section 467), the Treasury Department
and the IRS are considering a rule that ad-
dresses the application of sections 451(b)
(2) and (4) to contracts with income that
is accounted for in part under section 451
and in part under a special method of ac-
counting provision. The Treasury Depart-
ment and the IRS are also considering a
similar rule that addresses the application
of section 451(c)(4)(D) to certain pay-
ments received under such contracts. The
Treasury Department and the IRS have
determined that these rules would benefit
from further notice and public comment.
The Treasury Department and the IRS
are considering a rule providing that if an
accrual method taxpayer with an AFS has
a contract with a customer that includes
one or more items of gross income sub-
ject to a special method of accounting (as
defined in proposed §1.451-3(c)(5)) and
one or more items of gross income sub-
ject to section 451, the allocation rules
under section 451(b)(4) do not apply to
determine the amount of each item of
gross income that is accounted for under
the special method of accounting provi-
sion. Accordingly, the transaction price
allocation rules in section 451(b)(4) and
proposed §1.451-3(g)(1) (as contained
in REG-104870-18) would apply to only
the portion of the gross transaction price
that is not accounted for under the special
method of accounting provision (that is,
the residual amount) and only to the ex-
tent the contract contains more than one
performance obligation that is subject to
section 451. To the extent such a contract
contains more than one performance obli-
gation that is subject to section 451, the re-
sidual amount would be allocated to each
section 451 performance obligation in
proportion to the amount allocated to each
such performance obligation for purposes
of including such item in revenue in the
taxpayer’s AFS. The Treasury Department
and the IRS request comments on this rule
(section 451(b) special method allocation
rule), including (i) whether taxpayers
should be permitted to use the allocation
rules under section 451(b)(4) to determine
the amount of an item of gross income
that is accounted for under a special meth-
od of accounting, (ii) whether a specific
allocation standard should be provided
for determining the amount of an item of
gross income that is accounted for under a
special method of accounting in situations
where an allocation standard is not pro-
vided under the applicable special method
of accounting rules, and (iii) whether al-
ternative allocation options may be appro-
priate for allocating the residual amount to
multiple performance obligations that are
within the scope of section 451.
The Treasury Department and the IRS
are also considering a similar allocation
rule for purposes of applying the advance
payment rules under section 451(c). Spe-
cifically, the Treasury Department and the
IRS are considering a rule providing that
if an accrual method taxpayer with an AFS
receives a payment that is attributable to
one or more items of gross income that
are described in proposed §1.451-8(b)(1)
(i)(C) and one or more items of gross in-
come that are subject to a special meth-
od of accounting (as defined in proposed
§1.451-3(c)(5)), then the taxpayer must
determine the portion of the payment al-

August 17, 2020 448 Bulletin No. 2020–34
locable to the item(s) of gross income that
are described in proposed §1.451-8(b)(1)
(i)(C) by using an objective criteria stan-
dard (consistent with objective criteria
standard under section 5.02(4) of Revenue
Procedure 2004-34 (2004-22 IRB 991)).
Under this rule a taxpayer that allocates
the payment to each item of gross income
in proportion to the total amount of each
such item of gross income (as determined
under the section 451(b) special method
allocation rule that is described in the pre-
ceding paragraph), will be deemed to have
meet the objective criteria standard. The
Treasury Department and the IRS request
comments on this rule, including whether
alternative payment allocation approaches
may be more appropriate (for example, an
approach that permits the taxpayer to fol-
low its AFS allocation).
Proposed Applicability Date
These regulations are proposed to be
applicable for taxable years beginning
on or after the date the Treasury Deci-
sion adopting these proposed regulations
as final is published in the Federal Reg-
ister. For taxable years beginning before
the date the Treasury Decision adopting
these regulations as final is published in
the Federal Register, see §§ 1.448-1,
1.448-2, 1.263A-0, 1.263A-1, 1.263A-2,
1.263A-3, 1.263A-4, 1.263A-7, 1.263A-
8, 1.263A-9, 1.263A-15, 1.381-1, 1.446-1,
1.460-0, 1.460-1, 1.460-3, 1.460-4, 1.460-
5, 1.460-6, and 1.471-1 as contained in 26
CFR part 1, April 1, 2019.
However, for taxable years beginning
after December 31, 2017, and before the
date the Treasury Decision adopting these
regulations as final regulations is published
in the Federal Register, a taxpayer may
rely on these proposed regulations, provid-
ed that the taxpayer follows all the appli-
cable rules contained in the proposed reg-
ulations for each Code provision that the
taxpayer chooses to apply. For example, a
taxpayer using an accrual method with in-
ventory subject to the capitalization rules
of section 263A, may rely on proposed
§1.448-2 to determine whether it must
continue its use of its accrual method and
proposed §1.263A-1 to determine its cost
capitalizing rules, but may maintain its cur-
rent inventory method rather than follow
the proposed regulations under section 471.
Statement of Availability of IRS
Documents
The IRS notices, revenue rulings, and
revenue procedures cited in this pream-
ble are published in the Internal Revenue
Bulletin (or Cumulative Bulletin) and are
available from the Superintendent of Doc-
uments, U.S. Government Publishing Of-
fice, Washington, DC 20402, or by visit-
ing the IRS website at http://www.irs.gov.
Special Analysis
This regulation is not subject to review
under section 6(b) of Executive Order
12866 pursuant to the Memorandum of
Agreement (April 11, 2018) between the
Treasury Department and the Office of
Management and Budget regarding re-
view of tax regulations.
I. Paperwork Reduction Act
Proposed §1.448-2(b)(2)(iii)(B) im-
poses a collection of information for an
election to use prior year’s allocated tax-
able income or loss to determine whether
a partnership or other entity (other than a
C corporation) is a “syndicate” for pur-
poses of section 448(d)(3) for the current
tax year. The election is made by attach-
ing a statement to the taxpayer’s original
Federal income tax return for the current
tax year. The election is binding for all
subsequent taxable years, and can only be
revoked with the consent of the Commis-
sioner. The collection of information is
voluntary for purposes of obtaining a ben-
efit under the proposed regulations. The
likely respondents are businesses or other
for-profit institutions, and small business-
es or organizations.
Estimated total annual reporting bur-
den: 199,289 hours
Estimated average annual burden
hours per respondent: 1 hour
Estimated number of respondents:
199,289
Estimated annual frequency of re-
sponses: once.
Other than the election statement,
these proposed regulations do not impose
any additional information collection re-
quirements in the form of reporting, re-
cordkeeping requirements or third-party
disclosure statements. However, because
the exemptions in sections 263A, 448,
460 and 471 are methods of accounting
under the statute, taxpayers are required
to request the consent of the Commission-
er for a change in method of accounting
under section 446(e) to implement the
statutory exemptions. The IRS expects
that these taxpayers will request this con-
sent by filing Form 3115, Application for
Change in Accounting Method. Taxpayers
may request these changes using reduced
filing requirements by completing only
certain parts of Form 3115. See Revenue
Procedure 2018-40 (2018-34 I.R.B. 320).
Revenue Procedure 2018-40 provides pro-
cedures for a taxpayer to make a change in
method of accounting using the automatic
change procedures of Revenue Procedure
2015-13 (2015-5 IRB 419) in order to
use the exemptions provided in sections
263A, 460 and/or 471.
For purposes of the Paperwork Re-
duction Act of 1995 (44 U.S.C. 3507(c))
(PRA), the reporting burden associated
with the collection of information for the
election statement and Form 3115 will be
reflected in the PRA submission associat-
ed with the income tax returns under the
OMB control number 1545-0074 (in the
case of individual filers of Form 3115) and
1545-0123 (in the case of business filers
of Form 3115).
In 2018, the IRS released and invited
comment on a draft of Form 3115 in or-
der to give members of the public the op-
portunity to benefit from certain specific
provisions made to the Code. The IRS re-
ceived no comments on the forms during
the comment period. Consequently the
IRS made the forms available in January
2019 for use by the public. The IRS notes
that Form 3115 applies to changes of ac-
counting methods generally and is there-
fore broader than sections 263A, 448, 460
and 471.
As discussed above, the reporting bur-
dens associated with the proposed reg-
ulations are included in the aggregated
burden estimates for OMB control num-
bers 1545-0074 (in the case of individ-
ual filers of Form 3115), 1545-0123 (in
the case of business filers of Form 3115
subject to Revenue Procedure 2019-43
and business filers that make the election
under proposed §1.448-2(b)(2)(iii)(B)).
The overall burden estimates associated
with the OMB control numbers below

Bulletin No. 2020–34 449 August 17, 2020
are aggregate amounts related to the en-
tire package of forms associated with
the applicable OMB control number and
will include, but not isolate, the estimat-
ed burden of the tax forms that will be
created or revised as a result of the in-
formation collections in these proposed
regulations. These numbers are therefore
not specific to the burden imposed by
these proposed regulations. The burdens
have been reported for other income tax
regulations that rely on the same infor-
mation collections and the Treasury De-
partment and the IRS urge readers to rec-
ognize that these numbers are duplicates
and to guard against overcounting the
burdens imposed by tax provisions prior
to the Act. No burden estimates specif-
ic to the forms affected by the proposed
regulations are currently available. For
the OMB control numbers discussed in
the preceding paragraphs, the Treasury
Department and the IRS estimate PRA
burdens on a taxpayer-type basis rather
than a provision-specific basis. Those
estimates capture both changes made by
the Act and those that arise out of dis-
cretionary authority exercised in the pro-
posed regulations (when final) and other
regulations that affect the compliance
burden for that form.
The Treasury Department and IRS
request comment on all aspects of infor-
mation collection burdens related to the
proposed regulations, including estimates
for how much time it would take to com-
ply with the paperwork burdens described
above for each relevant form and ways
for the IRS to minimize paperwork bur-
den. In addition, when available, drafts
of IRS forms are posted for comment at
https://appsirs.gov/app/picklist/lit/draft
TaxForms.htm. IRS forms are available
at https://www.irs.gov/forms-instructions.
Forms will not be finalized until after they
have been approved by OMB under the
PRA.
II. Regulatory Flexibility Act
The Regulatory Flexibility Act (5
U.S.C. 601 et seq.) (RFA) imposes certain
requirements with respect to federal rules
that are subject to the notice and comment
requirements of section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. 551
et seq.) and that are likely to have a sig-
nificant economic impact on a substantial
number of small entities. Unless an agen-
cy determines that a proposal is not likely
to have a significant economic impact on
a substantial number of small entities, sec-
tion 603 of the RFA requires the agency
to present an initial regulatory flexibility
analysis (IRFA) of the proposed rules. The
Treasury Department and the IRS have not
determined whether the proposed rules,
when finalized, will likely have a signif-
icant economic impact on a substantial
number of small entities. The determina-
tion of whether the voluntary exemptions
under sections 263A, 448, 460, and 471
will have a significant economic impact
requires further study. However, because
there is a possibility of significant eco-
nomic impact on a substantial number
of small entities, an IRFA is provided in
these proposed regulations. The Treasury
Department and the IRS invite comments
on both the number of entities affected
and the economic impact on small entities.
Pursuant to section 7805(f) of the
Code, this notice of proposed rulemaking
has been submitted to the Chief Counsel
of Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business.
1. Need for and Objectives of the Rule
As discussed earlier in the preamble,
these proposed regulations largely imple-
ment voluntary exemptions that relieve
small business taxpayers from otherwise
applicable restrictions and requirements
under sections 263A, 448, 460, and 471.
Section 448 provides a general restric-
tion for C corporations and partnerships
with C corporation partners from using the
cash method of accounting, and sections
263A, 460 and 471 impose specific rules
on uniform capitalization of direct and
indirect production costs, the percentage
of completion method for long-term con-
tracts, and accounting for inventory costs,
respectively. Section 13102 of TCJA pro-
vided new statutory exemptions from cer-
tain of these rules and expanded the scope
of existing statutory exemptions from cer-
tain of these rules to reduce compliance
burdens for small taxpayers. The proposed
regulations clarify the exemption qualifi-
cation requirements and provide guidance
with respect to the applicable methods of
accounting should a taxpayer choose to
apply one or more exemptions.
The objective of the proposed regula-
tions is to provide clarity and certainty for
small business taxpayers implementing
the exemptions. Under the Code, small
business taxpayers were able to imple-
ment these provisions for taxable years
beginning after December 31, 2017 (or,
in the case of section 460, for contracts
entered into after December 31, 2017)
even in the absence of these proposed
regulations. Thus, the Treasury Depart-
ment and the IRS expect that, at the time
these proposed regulations are published,
many small business taxpayers may have
already implemented some aspects of the
proposed regulations.
2. Affected Small Entities
The voluntary exemptions under sec-
tions 263A, 448, 460 and 471 generally
apply to taxpayers that meet the $25 mil-
lion (adjusted for inflation) gross receipts
test in section 448(c) and are otherwise
subject to general rules under sections
263A, 448, 460, or 471.
A. Section 263A
The Treasury Department and the
IRS expect that the addition of section
263A(i) will expand the number of small
business taxpayers exempted from the
requirement to capitalize costs, includ-
ing interest, under section 263A. Under
section 263A(i), taxpayers (other than
tax shelters) that meet the $25 million
(adjusted for inflation) gross receipts test
in section 448(c) can choose to deduct
certain costs that are otherwise required
to be capitalized to the basis of property.
Section 263A applies to taxpayers that
are producers, resellers, and taxpayers
with self-constructed assets. The Trea-
sury Department and the IRS estimate
that there are between 38,100 and 38,900
respondents with gross receipts of not
more than $25 million (adjusted for in-
flation) that are eligible to change their
method of accounting to no longer cap-
italize costs under section 263A. These
estimates come from information collect-
ed on: Form 1125-A, Cost of Goods Sold,
and attached to Form 1120, U.S. Corpo-
ration Income Tax Return, Form 1065,

August 17, 2020 450 Bulletin No. 2020–34
U.S. Return of Partnership Income or
Form 1120-S, U.S. Income Tax Return for
an S Corporation, on which the taxpayer
also indicated it had additional section
263A costs. The Treasury Department
and the IRS do not have readily available
data to measure the prevalence of entities
with self-constructed assets. In addition,
these data also do not include other busi-
ness entities, such as a business reported
on Schedule C, Profit or Loss Form Busi-
ness, of an individual’s Form 1040, U.S.
Individual Income Tax Return.
Under section 263A, as modified by
the TCJA, small business entities that
qualified for Section 263A small reseller
exception will no longer be able to use this
exception. The Treasury Department and
the IRS estimate that nearly all taxpayers
that qualified for the small reseller excep-
tion will qualify for the small business
taxpayer exemption under section 263A(i)
since the small reseller exception utilized
a $10 million gross receipts test. The Trea-
sury Department and the IRS estimate that
there are between 38,100 and 38,900 re-
spondents with gross receipts of not more
than $25 million that are eligible for the
exemption under section 263A(i). These
estimates come from information collect-
ed on: Form 1125-A, Cost of Goods Sold,
and attached to Form 1120, U.S. Corpora-
tion Income Tax Return, Form 1065, U.S.
Return of Partnership Income or Form
1120-S, U.S. Income Tax Return for an S
Corporation on which the taxpayer also
indicated it had additional section 263A
costs. These data provide an upper bound
for the number of taxpayers affected by
the repeal of the small reseller exception
and enactment of section 263A(i) because
the data includes taxpayers that were not
previously eligible for the small reseller
exception, such as producers and taxpay-
ers with gross receipts of more than $10
million.
The proposed regulations modi-
fy the $50 million gross receipts test in
§1.263A-1(d)(3)(ii)(B)(1) by using the
section 448 gross receipts test. The $50
million gross receipts amount is used by
taxpayers to determine whether they are
eligible to treat negative adjustments as
additional section 263A costs for purpos-
es of the simplified production method
(SPM) under section 263A. The Treasury
Department and the IRS do not have read-
ily available data to measure the preva-
lence of entities using the SPM.
Proposed §1.263A-9 modifies the cur-
rent regulation to increase the eligibility
threshold to $25 million for the election
permitting taxpayers to use the highest
applicable Federal rate as a substitute for
the weighted average interest rate when
tracing debt for purposes of capitalizing
interest under section 263A(f). The Trea-
sury Department and the IRS estimate that
there are between 38,100 and 38,900 re-
spondents with gross receipts of not more
than $25 million that are eligible to make
this election. These estimates come from
information collected on: Form 1125-A,
Cost of Goods Sold, attached to Form
1120, U.S. Corporation Income Tax Re-
turn, Form 1065, U.S. Return of Part-
nership Income or Form 1120-S, U.S.
Income Tax Return for an S Corporation,
on which the taxpayer also indicated it had
additional section 263A costs. The Trea-
sury Department and the IRS expect that
many taxpayers eligible to make the elec-
tion for purposes of section 263A(f) will
instead elect the small business exemption
under section 263A(i). Additionally, tax-
payers who chose to apply section 263A
even though they qualify for the small
business exemption under 263A(i) may
not have interest expense required to be
capitalized under section 263A(f). As a
result, although these data do not include
taxpayers with self-constructed assets that
are eligible for the election, the Treasury
Department and the IRS estimate that this
data provides an upper bound for the num-
ber of eligible taxpayers.
B. Section 448
The Treasury Department and the IRS
expect that the changes to section 448(c)
by the TCJA will expand the number of
taxpayers permitted to use the cash meth-
od. Section 448(a) provides that C corpo-
rations, partnerships with C corporations
as partners, and tax shelters are not per-
mitted to use the cash method of account-
ing; however section 448(c), as amended
by the TCJA, provides that C corporations
or partnerships with C corporations as
partners, other than tax shelters, are not
restricted from using the cash method if
their average annual gross receipts are $25
million (adjusted for inflation) or less. Pri-
or to the amendments made by the TCJA,
the applicable gross receipts threshold
was $5 million. Section 448 does not ap-
ply to S corporations, partnerships with-
out a C corporation partner, or any other
business entities (including sole propri-
etorships reported on an individual’s Form
1040). The Treasury Department and
the IRS estimate that there are between
587,000 and 595,000 respondents with
gross receipts of not more than $5 million
presently using an accrual method, and
between 70,000 and 73,000 respondents
with gross receipts of more than $5 mil-
lion but not more than $25 million that are
permitted to use to the cash method. These
estimates come information collected on
Form 1120, U.S. Corporation Income Tax
Return, Form 1065, U.S. Return of Part-
nership Income and Form 1120-S, U.S.
Income Tax Return for an S Corporation.
Under the proposed regulations, tax-
payers that would meet the gross receipts
test of section 448(c) and seem to be eligi-
ble to use the cash method but for the defi-
nition of “syndicate” under section 448(d)
(3), may elect to use the allocated taxable
income or loss of the immediately preced-
ing taxable year to determine whether the
taxpayer is a “syndicate” for purposes of
section 448(d)(3) for the current taxable
year. The Treasury Department and IRS
estimate that 199,289 respondents may
potentially make this election. This esti-
mate comes from information collected
on the Form 1065, U.S. Return of Part-
nership Income and Form 1120-S, U.S.
Income Tax Return for an S Corporation,
and the Form 1125-A, Cost of Goods Sold,
attached to the Forms 1065 and 1120-S .
The Treasury Department and the IRS
estimate that these data provide an upper
bound for the number of eligible taxpay-
ers because not all taxpayers eligible to
make the election will choose to do so.
C. Section 460
The Treasury Department and the IRS
expect that the modification of section
460(e)(1)(B) by the TCJA will expand
the number of taxpayers exempted from
the requirement to apply the percent-
age-of-completion method to long-term
construction contracts. Under section
460(e)(1)(B), as modified by the TCJA,
taxpayers (other than a tax shelters) that

Bulletin No. 2020–34 451 August 17, 2020
meet the $25 million (adjusted for in-
flation) gross receipts test in section
448(c) are not required to use PCM to ac-
count for income from a long-term con-
struction contract expected to be complet-
ed in two years. Prior to the modification
of section 460(e)(1)(B) by the TCJA, a
separate $10 million dollar gross receipts
test applied. The Treasury Department and
the IRS estimate that there are between
15,400 and 18,000 respondents with gross
receipts of between $10 million and $25
million who are eligible to change their
method of accounting to apply the modi-
fied exemption. This estimate comes from
information collected on the Form 1120,
U.S. Corporation Income Tax Return,
Form 1065, U.S. Return of Partnership In-
come and Form 1120-S, U.S. Income Tax
Return for an S Corporation in which the
taxpayer indicated its principal business
activity was construction (NAICS codes
beginning with 23). These data available
do not distinguish between long-term con-
tracts and other contracts, and also do not
include other business entities that do not
file Form 1120, U.S. Corporation Income
Tax Return, Form 1065, U.S. Return of
Partnership Income, and Form 1120-S,
U.S. Income Tax Return for an S Cor-
poration, such as a business reported on
Schedule C, Profit or Loss from Business,
of an individual’s Form 1040, U.S. Indi-
vidual Income Tax Return.
D. Section 471
The Treasury Department and the IRS
expect that the addition of section 471(c)
will expand the number of taxpayers ex-
empted from the requirement to take in-
ventories under section 471(a). Under
section 471(c), taxpayers (other than tax
shelters) that meet the $25 million (ad-
justed for inflation) gross receipts test in
section 448(c) can choose to apply cer-
tain simplified inventory methods rather
than those otherwise required by section
471(a). The Treasury Department and
the IRS estimate that there are between
3,200,000 and 3,400,000 respondents with
gross receipts of not more than $25 million
that are exempted from the requirement to
take inventories, and will treat their inven-
tory either as non-incidental materials and
supplies, or conform their inventory meth-
od to the method reflected in their AFS, or
if they do not have an AFS, in their books
and records. This estimate comes from
data collected on the Form 1125-A, Cost
of Goods Sold. Within that set of taxpay-
ers, the Treasury Department and the IRS
estimate that there are between 10,500
and 11,300 respondents that may choose
to conform their method of accounting
for inventories to their method for inven-
tory reflected in their AFS. This estimate
comes from IRS-collected data on tax-
payers that filed the Form 1125-A, Cost of
Goods Sold, in addition to a Schedule M3,
Net Income (Loss) Reconciliation for Cor-
porations With Total Assets of $10 Million
or More, that indicated they had an AFS.
These data provide a lower bound because
they do not include other business entities,
such as a business reported on Schedule
C, Profit or Loss from Business, of an in-
dividual’s Form 1040, U.S. Individual In-
come Tax Return, that are not required to
file the Form 1125-A, Cost of Goods Sold.
3. Impact of the Rule
As discussed earlier in the preamble,
section 448 provides a general restric-
tion for C corporations, partnerships with
C corporation partners, and tax shelters
from using the cash method of accounting,
and sections 263A, 460 and 471 impose
specific rules on uniform capitalization
of direct and indirect production costs,
the percentage of completion method
for long-term contracts, and accounting
for inventory costs, respectively. Section
13102 of TCJA provided new statutory
exemptions and expanded the scope of
existing statutory exemptions from these
rules to reduce compliance burdens for
small taxpayers (e.g., reducing the bur-
dens associated with applying complex
accrual rules under section 451 and 461,
maintaining inventories, identifying and
tracking costs that are allocable to proper-
ty produced or acquired for resale, identi-
fying and tracking costs that are allocable
to long-term contracts, applying the look-
back method under section 460, etc.). For
example, a small business taxpayer with
average gross receipts of $20 million may
pay an accountant an annual fee to per-
form a 25 hour analysis to determine the
section 263A costs that are capitalized to
inventory produced during the year. If this
taxpayer chooses to apply the exemption
under section 263A and these proposed
regulations, it will no longer need to pay
an accountant for the annual section 263A
analysis.
The proposed regulations implement-
ing these exemptions are completely vol-
untary because small business taxpayers
may continue using an accrual method of
accounting, and applying sections 263A,
460 and 471 if they so choose. Thus, the
exemptions increase the flexibility small
business taxpayers have regarding their
accounting methods relative to other busi-
nesses. The proposed regulations provide
clarity and certainty for small business
taxpayers implementing the exemptions.
4. Projected Reporting, Recordkeeping,
and Other Compliance Requirements
The Treasury Department and the
IRS have not performed an analysis with
respect to the projected reporting, re-
cordkeeping, and other compliance re-
quirements associated with the statutory
exemptions under sections 263A, 448,
460, and 471 and the proposed regulations
implementing these exemptions. Howev-
er, the Treasury Department and the IRS
anticipate that the statutory exemptions
and the proposed regulations implement-
ing these exemptions will reduce the re-
porting, recordkeeping, and other compli-
ance requirements of affected taxpayers
relative to the requirements that exist un-
der the general rules in sections 263A,
448, 460, and 471.
5. Alternatives Considered
As described in more detail earlier in
the preamble, the Treasury Department
and the IRS considered a number of alter-
natives under the proposed regulations.
For example, in providing rules related
to inventory exemption in Section 471(c)
(1)(B)(i), which permits the taxpayer to
treat its inventory as non-incidental ma-
terials and supplies, the Treasury Depart-
ment and the IRS considered whether
inventoriable costs should be recovered
by (i) using an approach similar to the
approach set forth under Revenue Pro-
cedure 2001-10 (2001-2 IRB 272) and
Revenue Procedure 2002-28 (2002-28
IRB 815), which provided that inventory
treated as non-incidental materials and

August 17, 2020 452 Bulletin No. 2020–34
supplies was “used and consumed,” and
thus recovered through costs of goods
sold by a cash basis taxpayer, when the
inventory items were provided to a cus-
tomer, or when the taxpayer paid for the
items, whichever was later, or (ii) us-
ing an alternative approach that treated
inventory as “used and consumed” and
thus recovered through costs of goods
sold by the taxpayer, in a taxable year
prior to the year in which the inventory
item is provided to the customer (e.g., in
the taxable year in which an inventory
item is acquired or produced). The alter-
native approach described in (ii) would
produce a savings equal the amount of
the cost recovery multiplied by an ap-
plicable discount rate (determined based
on the number of years the cost of goods
sold recovery would be accelerated un-
der this alternative). The Treasury De-
partment and the IRS interpret section
471(c)(1)(B)(i) and its legislative history
generally as codifying the rules provided
in the administrative guidance existing
at the time TCJA was enacted. Based on
this interpretation, the Treasury Depart-
ment and the IRS have determined that
section 471(c) materials and supplies are
“used and consumed” in the taxable year
the taxpayer provides the goods to a cus-
tomer, and are recovered through costs
of goods sold in that year or the tax-
able year in which the cost of the goods
is paid or incurred (in accordance with
the taxpayer’s method of accounting),
whichever is later. The Treasury Depart-
ment and the IRS do not believe this ap-
proach creates or imposes undue burdens
on taxpayers.
6. Duplicate, Overlapping, or Relevant
Federal Rules
The proposed rules would not conflict
with any relevant federal rules. As dis-
cussed above, the proposed regulations
merely implement voluntary exemptions
that relieve small business taxpayers from
otherwise applicable restrictions and re-
quirements under sections 263A, 448,
460, and 471.
III. Executive Order 13132: Federalism
Executive Order 13132 (entitled
“Federalism”) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
state and local governments, and is not
required by statute, or preempts state law,
unless the agency meets the consultation
and funding requirements of section 6 of
the Executive Order. This final rule does
not have federalism implications and does
not impose substantial, direct compliance
costs on state and local governments or
preempt state law within the meaning of
the Executive Order.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the IRS as prescribed
in this preamble under the “ADDRESS-
ES” heading. The Treasury Department
and the IRS request comments on all as-
pects of the proposed regulations. Any
electronic comments submitted, and to the
extent practicable any paper comments
submitted, will be made available at www.
regulations.gov or upon request.
A public hearing will be scheduled if
requested in writing by any person who
timely submits electronic or written com-
ments. Requests for a public hearing are
also encouraged to be made electronically.
If a public hearing is scheduled, notice of
the date and time for the public hearing
will be published in the Federal Register.
Announcement 2020-4, 2020-17 I.R.B.
667 (April 20, 2020), provides that until
further notice, public hearings conducted
by the IRS will be held telephonically.
Any telephonic hearing will be made ac-
cessible to people with disabilities.
Drafting Information
The principal author of these proposed
regulations is Anna Gleysteen, IRS Office
of the Associate Chief Counsel (Income
Tax and Accounting). However, other per-
sonnel from the Treasury Department and
the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.263A-0 is amended
by:
1. Revising the entry in the table of
contents for §1.263A-1(b)(1).
2. Redesignating the entries in the table
of contents for §1.263A-1(j), (k), and (l) as
the entries for §1.263A-1(k), (l), and (m).
3. Adding a new entry in the table of
contents for §1.263A-1(j).
4. Revising the newly designated en-
tries for §1.263A-1(k), (l), and (m).
5. Revising the entries in the table of
contents for §1.263A-3(a)(2)(ii).
6. Adding entries for §1.263A-3(a)(5)
and revising the entry for §1.263A-3(b).
7. Redesignating the entries in the table
of contents for §1.263A-4(a)(3) and (4) as
the entries for §1.263A-4(a)(4) and (5).
8. Adding in the table of contents a new
entry for §1.263A-4(a)(3).
9. Revising the entry in the table of
contents for §1.263A-4(d) introductory
text.
10. Redesignating the entry in the table
of contents for §1.263A-4(d)(5) as the en-
try for §1.263A-4(d)(7).
11. Adding in the table of contents a
new entry for §1.263A-4(d)(5).
12. Adding an entry in the table of con-
tents for §1.263A-4(d)(6).
13. Adding an entry in the table of con-
tents for §1.263A-4(e)(5).
14. Revising the entry in the table of
contents for §1.263A-4(f) introductory
text.
15. Adding an entry in the table of con-
tents for §1.263A-4(g).
16. Revising the entry in the table of
contents for §1.263A-7(a)(4).
The revisions and additions read as fol-
lows:
§1.263A-0 Outline of regulations under
section 263A.
* * * * *

Bulletin No. 2020–34 453 August 17, 2020
§1.263A-1 Uniform Capitalization of
Costs.
* * * * *
(b) * * *
(1) Small business taxpayers.
* * * * *
(j) Exemption for certain small busi-
ness taxpayers.
(1) In general.
(2) Application of the section 448(c)
gross receipts test.
(i) In general.
(ii) Gross receipts of individuals, etc.
(iii) Partners and S corporation share-
holders.
(iv) Examples.
(A) Example 1
(B) Example 2
(3) Change in method of accounting.
(i) In general.
(ii) Prior section 263A method change.
(k) Special rules
(1) Costs provided by a related person.
(i) In general
(ii) Exceptions
(2) Optional capitalization of period
costs.
(i) In general.
(ii) Period costs eligible for capitaliza-
tion.
(3) Trade or business application
(4) Transfers with a principal purpose
of tax avoidance. [Reserved]
(l) Change in method of accounting.
(1) In general.
(2) Scope limitations.
(3) Audit protection.
(4) Section 481(a) adjustment.
(5) Time for requesting change.
(m) Effective/applicability date.
§1.263A-3 Rules Relating to Property
Acquired for Resale.
(a) * * *
(2) * * *
(ii) Exemption for small business tax-
payers.
* * * * *
(5) De minimis production activities.
(i) In general.
(ii) Definition of gross receipts to de-
termine de minimis production activities.
(iii) Example.
(b) [Reserved].
* * * * *
§1.263A-4 Rules for Property Produced
in a Farming Business.
(a) * * *
(3) Exemption for certain small busi-
ness taxpayers.
* * * * *
(d) Election not to have section 263A
apply under section 263A(d)(3).
* * * * *
(5) Revocation of section 263A(d)(3)
election in order to apply exemption under
section 263A(i).
(6) Change from applying exemption
under section 263A(i) to making a section
263A(d)(3) election.
* * * * *
(e) * * *
(5) Special temporary rule for citrus
plants lost by reason of casualty.
(f) Change in method of accounting.
* * * * *
(g) Effective date.
(1) In general.
(2) Changes made by Tax Cuts and
Jobs Act (Pub. L. No. 115-97).
§1.263A-7 Changing a method of
accounting under section 263A.
(a) * * *
(4) Applicability dates.
(i) In general.
(ii) Changes made by Tax Cuts and
Jobs Act (Pub. L. No. 115-97).
* * * * *
Par. 3. Section 1.263A-1 is amended
by:
1. Revising the paragraph (a)(2) sub-
ject heading.
2. In paragraph (a)(2)(i), revising the
second sentence and adding a new third
sentence.
3. Revising paragraph (b)(1).
4. In the second sentence of para-
graph (d)(3)(ii)(B)(1), the language
“§1.263A-3(b)” is removed and the lan-
guage “§1.263A-1(j)” is added in its place.
5. Redesignating paragraphs (j) through
(l) as paragraphs (k) through (m).
6. Adding a new paragraph (j).
The revisions and addition read as fol-
lows:
§1.263A-1 Uniform capitalization of costs.
(a) * * *
(2) Applicability dates. (i) * * *In the
case of property that is inventory in the
hands of the taxpayer, however, these
sections are applicable for taxable years
beginning after December 31, 1993. The
small business taxpayer exception de-
scribed in paragraph (b)(1) of this section
and set forth in paragraph (j) of this sec-
tion is applicable for taxable years begin-
ning after December 31, 2017. * * *
* * * * *
(b) * * *
(1) Small business taxpayers. For tax-
able years beginning after December 31,
2017, see section 263A(i) and paragraph
(j) of this section for an exemption for
certain small business taxpayers from the
requirements of section 263A.
* * * * *
(j) Exemption for certain small busi-
ness taxpayers—(1) In general. A tax-
payer, other than a tax shelter prohibited
from using the cash receipts and disburse-
ments method of accounting under section
448(a)(3), that meets the gross receipts
test under section 448(c) and §1.448-2(c)
(section 448(c) gross receipts test) for any
taxable year (small business taxpayer) is
not required to capitalize costs under sec-
tion 263A to any real or tangible personal
property produced, and any real or person-
al property described in section 1221(a)
(1) acquired for resale, during that taxable
year.
(2) Application of the section 448(c)
gross receipts test—(i) In general. In the
case of any taxpayer that is not a corpo-
ration or a partnership, and except as pro-
vided in paragraphs (j)(2)(ii) and (iii) of
this section, the section 448(c) gross re-
ceipts test is applied in the same manner
as if each trade or business of the taxpayer
were a corporation or partnership.
(ii) Gross receipts of individuals, etc.
Except when the aggregation rules of sec-
tion 448(c)(2) apply, the gross receipts
of a taxpayer other than a corporation or
partnership are the amount derived from
all trades or businesses of such taxpayer.
Amounts not related to a trade or business
are excluded from the gross receipts of
the taxpayer. For example, an individual
taxpayer’s gross receipts do not include
inherently personal amounts, such as per-
sonal injury awards or settlements with
respect to an injury of the individual tax-
payer, disability benefits, Social Security

August 17, 2020 454 Bulletin No. 2020–34
benefits received by the taxpayer during
the taxable year, and wages received as an
employee that are reported on Form W-2.
(iii) Partners and S corporation share-
holders. Except when the aggregation
rules of section 448(c)(2) apply, each part-
ner in a partnership includes a share of the
partnership’s gross receipts in proportion
to such partner’s distributive share (as de-
termined under section 704) of items of
gross income that were taken into account
by the partnership under section 703. Sim-
ilarly, a shareholder of an S corporation
includes such shareholder’s pro rata share
of S corporation gross receipts taken into
account by the S corporation under sec-
tion 1363(b).
(iv) Examples. The operation of this
paragraph (j) is illustrated by the follow-
ing examples:
(A) Example 1. Taxpayer A is an individual who
operates two separate and distinct trades or business
that are reported on Schedule C, Profit or Loss from
Business, of A’s Federal income tax return. For 2020,
one trade or business has annual average gross re-
ceipts of $5 million, and the other trade or business
has average annual gross receipts of $35 million.
Under paragraph (j)(2)(ii) of this section, for 2020,
neither of A’s trades or businesses meets the gross
receipts test of paragraph (j)(2) of this section ($5
million + $35 million = $40 million, which is greater
than the inflation-adjusted gross receipts test amount
for 2020, which is $26 million).
(B) Example 2. Taxpayer B is an individual who
operates three separate and distinct trades or busi-
ness that are reported on Schedule C of B’s Federal
income tax return. For 2020, Business X is a retail
store with average annual gross receipts of $15 mil-
lion, Business Y is a dance studio with average annu-
al gross receipts of $6 million, and Business Z is a car
repair shop with average annual gross receipts of $12
million. Under paragraph (j)(2)(ii) of this section,
B’s gross receipts are the combined amount derived
from all three of B’s trades or businesses. Therefore,
for 2020, X, Y and Z do not meet the gross receipts
test of paragraph (j)(2)(i) of this section ($15 million
+ $6 million + $12 million = $33 million, which is
greater than the inflation-adjusted gross receipts test
amount for 2020, which is $26 million).
(3) Change in method of accounting—
(i) In general. A change from applying the
small business taxpayer exemption under
paragraph (j) of this section to not apply-
ing the exemption under this paragraph
(j), or vice versa, is a change in method
of accounting under section 446(e) and
§1.446-1(e). A taxpayer obtains the con-
sent of the Commissioner to change its
method of accounting to comply with
paragraph (j) of this section by following
the applicable administrative procedures
to obtain the consent of the Commis-
sioner to change a method of accounting
under section 446(e) as published in the
Internal Revenue Bulletin (See Revenue
Procedure 2015-13, 2015-5 IRB 419 (or
successor) (see also §601.601(d)(2) of this
chapter)). If an item of income or expense
is not treated consistently from year to
year, that treatment may not clearly reflect
income, notwithstanding the application
of this section. For rules relating to the
clear reflection of income and the pattern
of consistent treatment of an item, see sec-
tion 446 and §1.446-1.
(ii) Prior section 263A method change.
A taxpayer that otherwise meets the re-
quirements of paragraph (j) of this sec-
tion, and that had previously changed its
method of accounting to capitalize costs
under section 263A because it no longer
met the section 448(c) gross receipts test,
may not change its method of accounting
under section 263A to apply the exemp-
tion under paragraph (j) of this section
without the consent of the Commission-
er. Taxpayers must follow the adminis-
trative procedures to obtain the consent
of the Commissioner to change a meth-
od of accounting under section 446(e) as
published in the Internal Revenue Bul-
letin (See Revenue Procedure 2015-13,
2015-5 IRB 419 (or successor) (see also
§601.601(d)(2) of this chapter)). For rules
relating to the clear reflection of income
and the pattern of consistent treatment of
an item, see section 446 and §1.446-1.
* * * * *
Par. 4. Section 1.263A-2 is amended
by:
1. Adding a sentence at the end of para-
graph (a) introductory text.
2. Revising paragraph (a)(1)(ii)(C).
3. Revising the paragraph (g) subject
heading.
4. Adding paragraph (g)(4).
The additions and revisions read as fol-
lows:
§1.263A-2 Rules relating to property
produced by the taxpayer.
(a) * * * For taxable years beginning af-
ter December 31, 2017, see §1.263A-1(j)
for an exception in the case of a small
business taxpayer that meets the gross re-
ceipts test of section 448(c) and §1.448-
2(c).
(1) * * *
(ii) * * *
(C) Home construction contracts. Sec-
tion 460(e)(1) provides that section 263A
applies to a home construction contract
unless that contract will be completed
within two years of the contract com-
mencement date and, for contracts entered
into after December 31, 2017, in taxable
years ending after December 31, 2017, the
taxpayer meets the gross receipts test of
section 448(c) and §1.448-2(c) for the tax-
able year in which such contract is entered
into.
* * * * *
(g) Applicability dates.* * *
(4) The rules set forth in the last sen-
tence of the introductory text of paragraph
(a) of this section and in paragraph (a)(1)
(ii)(C) of this section apply for taxable
years beginning on or after [date the Trea-
sury Decision adopting these proposed
regulations as final is published in the
Federal Register].
Par. 5. Section 1.263A-3 is amended:
1. In paragraph (a)(1), by revising the
second sentence.
2. By revising paragraphs (a)(2)(ii) and
(iii).
4. In paragraph (a)(3), by removing
the language “small reseller” and adding
in its place the language “small business
taxpayer”.
5. In paragraph (a)(4)(ii), by remov-
ing the language “(within the meaning of
paragraph (a)(2)(iii) of this section)” and
adding in its place the language “(within
the meaning of paragraph (a)(5) of this
section)”.
6. By adding paragraph (a)(5).
7. By removing and reserving para-
graph (b).
8. By revising paragraph (f).
The revisions and additions read as fol-
lows:
§1.263A-3 Rules relating to property
acquired for resale.
(a) * * *
(1) * * *However, for taxable years
beginning after December 31, 2017, a
small business taxpayer, as defined in
§1.263A-1(j), is not required to apply sec-
tion 263A in that taxable year.* * *
(2) * * *
(ii) Exemption for certain small busi-
ness taxpayers. For taxable years be-

Bulletin No. 2020–34 455 August 17, 2020
ginning after December 31, 2017, see
§1.263A-1(j) for an exception in the case
of a small business taxpayer that meets the
gross receipts test of section 448(c) and
§1.448-2(c).
(iii) De minimis production activities.
See paragraph (a)(5) of this section for
rules relating to an exception for resellers
with de minimis production activities.
* * * * *
(5) De minimis production activities—
(i) In general. In determining whether a
taxpayer’s production activities are de
minimis, all facts and circumstances must
be considered. For example, the taxpay-
er must consider the volume of the pro-
duction activities in its trade or business.
Production activities are presumed de mi-
nimis if—
(A) The gross receipts from the sale of
the property produced by the reseller are
less than 10 percent of the total gross re-
ceipts of the trade or business; and
(B) The labor costs allocable to the
trade or business’s production activities
are less than 10 percent of the reseller’s
total labor costs allocable to its trade or
business.
(ii) Definition of gross receipts to de-
termine de minimis production activities.
Gross receipts has the same definition
as for purposes of the gross receipts test
under §1.448-2(c), except that gross re-
ceipts are measured at the trade-or-busi-
ness level rather than at the single-em-
ployer level.
(iii) Example: Reseller with de minimis produc-
tion activities. Taxpayer N is in the retail grocery
business. In 2019, N’s average annual gross receipts
for the three previous taxable years are greater than
the gross receipts test of section 448(c). Thus, N is
not exempt from the requirement to capitalize costs
under section 263A. N’s grocery stores typically
contain bakeries where customers may purchase
baked goods produced by N. N produces no other
goods in its retail grocery business. N’s gross re-
ceipts from its bakeries are 5 percent of the entire
grocery business. N’s labor costs from its bakeries
are 3 percent of its total labor costs allocable to the
entire grocery business. Because both ratios are less
than 10 percent, N’s production activities are de mi-
nimis. Further, because N’s production activities are
incident to its resale activities, N may use the simpli-
fied resale method, as provided in paragraph (a)(4)
(ii) of this section.
* * * * *
(f) Applicability dates. (1) Paragraphs
(d)(3)(i)(C)(3), (d)(3)(i)(D)(3), and (d)(3)
(i)(E)(3) of this section apply for taxable
years ending on or after January 13, 2014.
(2) The rules set forth in the second
sentence of paragraph (a)(1) of this sec-
tion, paragraphs (a)(2)(ii) and (iii) of this
section, the third sentence of paragraph
(a)(3) of this section, and paragraphs (a)
(4)(ii) and (a)(5) of this section apply for
taxable years beginning on or after [date
the Treasury Decision adopting these pro-
posed regulations as final is published in
the Federal Register].
Par. 6. Section 1.263A-4 is amended:
1. In paragraph (a)(1), by revising the
last sentence.
2. In paragraph (a)(2)(ii)(A)(1), by re-
moving the language “section 464(c)” and
adding in its place the language with “sec-
tion 461(k)”.
3. By redesignating paragraphs (a)(3)
and (4) as paragraphs (a)(4) and (5) re-
spectively.
4. By adding new paragraph (a)(3).
5. By revising the paragraph (d) subject
heading.
6. In paragraph (d)(1), by revising the
last sentence and adding a new last sen-
tence.
7. In paragraph (d)(3)(i), by removing
the last sentence.
8. By revising paragraph (d)(3)(ii).
9. By redesignating paragraph (d)(5) as
paragraph (d)(7).
10. By adding new paragraph (d)(5)
11. By adding paragraphs (d)(6) and (e)
(5).
12. By redesignating paragraph (f) as
paragraph (g).
13. By adding new paragraph (f).
15. By revising the subject headings
for newly redesignated paragraphs (g)
and (g)(1), and revising newly designated
paragraph (g)(2).
The revisions and additions read as fol-
lows:
§1.263A-4 Rules for property produced in
a farming business.
(a) * * *
(1) * * *Except as provided in para-
graphs (a)(2), (a)(3), and (e) of this sec-
tion, taxpayers must capitalize the costs
of producing all plants and animals unless
the election described in paragraph (d) of
this section is made.
* * * * *
(3) Exemption for certain small busi-
ness taxpayers. For taxable years be-
ginning after December 31, 2017, see
§1.263A-1(j) for an exception in the case
of a small business taxpayer that meets the
gross receipts test of section 448(c) and
§1.448-2(c).
* * * * *
(d) Election not to have section 263A
apply under section 263A(d)(3)—(1) * * *
Except as provided in paragraph (d)(5) and
(6) of this section, the election is a method
of accounting under section 446. An elec-
tion made under section 263A(d)(3) and
this paragraph (d) is revocable only with
the consent of the Commissioner.
* * * * *
(3) * * *
(ii) Nonautomatic election. Except as
provided in paragraphs (d)(5) and (6) of
this section, a taxpayer that does not make
the election under this paragraph (d) as
provided in paragraph (d)(3)(i) of this sec-
tion must obtain the consent of the Com-
missioner to make the election by filing
a Form 3115, Application for Change in
Method of Accounting, in accordance with
§1.446-1(e)(3).
* * * * *
(5) Revocation of section 263A(d)(3)
election in order to apply exemption under
section 263A(i). A taxpayer that elected
under section 263A(d)(3) and paragraph
(d)(3) of this section not to have section
263A apply to any plant produced in a
farming business that wants to revoke its
section 263A(d)(3) election, and in the
same taxable year, apply the small business
taxpayer exemption under section 263A(i)
and §1.263A-1(j) may revoke the election
in accordance with the applicable admin-
istrative guidance as published in the In-
ternal Revenue Bulletin (see §601.601(d)
(2)(ii)(b) of this chapter). A revocation of
the taxpayer’s section 263A(d)(3) election
under this paragraph (d)(5) is not a change
in method of accounting under sections
446 and 481 and §§1.446-1 and 1.481-1
through 1.481-5.
(6) Change from applying exemption
under section 263A(i) to making a section
263A(d)(3) election. A taxpayer whose
method of accounting is to not capitalize
costs under section 263A based on the
exemption under section 263A(i), that
becomes ineligible to use the exemption
under section 263A(i), and is eligible
and wants to elect under section 263A(d)
(3) for this same taxable year to not cap-

August 17, 2020 456 Bulletin No. 2020–34
italize costs under section 263A for any
plant produced in the taxpayer’s farming
business, must make the election in accor-
dance with the applicable administrative
guidance as published in the Internal Rev-
enue Bulletin (see §601.601(d)(2)(ii)(b)
of this chapter). An election under section
263A(d)(3) made in accordance with this
paragraph (d)(6) is not a change in meth-
od of accounting under sections 446 and
481 and §§1.446-1 and 1.481-1 through
1.481-5.
* * * * *
(e) * * *
(5) Special temporary rule for citrus
plants lost by reason of casualty. Section
263A(d)(2)(A) provides that if plants bear-
ing an edible crop for human consumption
were lost or damaged while in the hands
of the taxpayer by reason of freezing tem-
peratures, disease, drought, pests, or casu-
alty, section 263A does not apply to any
costs of the taxpayer of replanting plants
bearing the same type of crop (whether
on the same parcel of land on which such
lost or damaged plants were located or any
other parcel of land of the same acreage in
the United States). The rules of this para-
graph (e)(5) apply to certain costs that are
paid or incurred after December 22, 2017,
and on or before December 22, 2027,
to replant citrus plants after the loss or
damage of citrus plants. Notwithstanding
paragraph (e)(2) of this section, in the case
of replanting citrus plants after the loss or
damage of citrus plants by reason of freez-
ing temperatures, disease, drought, pests,
or casualty, section 263A does not apply
to replanting costs paid or incurred by a
taxpayer other than the owner described in
section 263A(d)(2)(A) if—
(i) The owner described in section
263A(d)(2)(A) has an equity interest of
not less than 50 percent in the replanted
citrus plants at all times during the taxable
year in which such amounts were paid or
incurred and the taxpayer holds any part
of the remaining equity interest; or
(ii) The taxpayer acquired the entirety
of the equity interest in the land of that
owner described in section 263A(d)(2)(A)
and on which land the lost or damaged cit-
rus plants were located at the time of such
loss or damage, and the replanting is on
such land.
(f) Change in method of accounting.
Except as provided in paragraphs (d)(5)
and (6) of this section, any change in a tax-
payer’s method of accounting necessary
to comply with this section is a change in
method of accounting to which the provi-
sions of sections 446 and 481 and §1.446-
1 through 1.446-7 and §1.481-1 through
§1.481-3 apply.
(g) Applicability dates—(1) In gener-
al.* * *
(2) Changes made by Tax Cuts and
Jobs Act (Pub. L. No. 115-97). Paragraphs
(a)(3), (d)(5), (d)(6), and (e)(5) of this sec-
tion apply for taxable years ending on or
after [date the Treasury Decision adopting
these proposed regulations as final is pub-
lished in the Federal Register]. Except as
otherwise provided in this paragraph (g),
for taxable years beginning before [date
the Treasury Decision adopting these reg-
ulations as final is published in the Feder-
al Register], see §1.263A-4 as contained
in 26 CFR part 1, revised April 1, 2019.
Par. 7. §1.263A-7 is amended:
1. By revising paragraph (a)(3)(i).
2. By redesignating paragraph (a)(4) as
paragraph (a)(4)(i).
3. By adding a paragraph (a)(4) subject
heading.
4. By revising the newly designated
paragraph (a)(4)(i) subject heading.
5. By adding paragraph (a)(4)(ii).
6. In paragraph (b)(1), by removing
the language “Rev. Proc. 97-27 (1997-
21 I.R.B.10)” and adding in its place the
language “Revenue Procedure 2015-13
(2015-5 IRB 419)”.
7. In paragraph (b)(2)(ii), by removing
the language “Rev. Proc. 2002-9 (2002-1
C.B. 327) and Rev. Proc. 97-27 (1991-1
C.B. 680)” and adding the language “ap-
plicable administrative procedures” in its
place.
The revisions and additions read as fol-
lows:
§1.263A-7 Changing a method of
accounting under section 263A.
(a) * * *
(3) * * *
(i) For taxable years beginning after
December 31, 2017, resellers of real or
personal property or producers of real or
tangible personal property whose average
annual gross receipts for the immediate-
ly preceding 3-taxable-year period (or
lesser period if the taxpayer was not in
existence for the three preceding taxable
years, annualized as required) exceed the
gross receipts test of section 448(c) and
the accompanying regulations where the
taxpayer was not subject to section 263A
in the prior taxable year;
* * * * *
(4) Applicability dates—(i) In gener-
al.* * *
(ii) Changes made by Tax Cuts and
Jobs Act (Pub. L. No. 115-97). Paragraph
(a)(3)(i) of this section applies to taxable
years ending on or after [date the Treasury
Decision adopting these proposed regula-
tions as final is published in the Federal
Register]. Except as otherwise provided
in this paragraph (a)(4), for taxable years
beginning before [date the Treasury De-
cision adopting these regulations as final
is published in the Federal Register],
see §1.263A-7(a)(3)(i) as contained in 26
CFR part 1, revised April 1, 2019.
* * * * *
Par. 8. Section 1.263A-8 is amended by
adding a sentence to the end of paragraph
(a)(1) to read as follows:
§1.263A-8 Requirement to capitalize
interest.
(a)* * *
(1)* * *However, a taxpayer, other
than a tax shelter prohibited from using
the cash receipts and disbursements meth-
od of accounting under section 448(a)(3),
that meets the gross receipts test of section
448(c) for the taxable year is not required
to capitalize costs, including interest, un-
der section 263A. See §1.263A-1(j).
* * * * *
Par. 9. Section 1.263A-9 is amended by
adding a sentence at the end of paragraph
(e)(2) to read as follows:
§1.263A-9 The avoided cost method.
* * * * *
(e)* * *
(2)* * *A taxpayer is an eligible tax-
payer for a taxable year for purposes
of this paragraph (e) if the taxpayer is a
small business taxpayer, as defined in
§1.263A-1(j).
* * * * *
Par. 10. Section 1.263A-15 is amend-
ed by adding paragraph (a)(4) to read as
follows:

Bulletin No. 2020–34 457 August 17, 2020
§1.263A-15 Effective dates, transitional
rules, and anti-abuse rule.
(a) * * *
(4) The last sentence of each of
§1.263A-8(a)(1) and §1.263A-9(e)(2) ap-
ply to taxable years beginning on or after
[date the Treasury decision adopting these
proposed regulations as final is published
in the Federal Register]. Except as oth-
erwise provided in this paragraph (a)(4),
for taxable years beginning before [date
the Treasury decision adopting these reg-
ulations as final is published in the Fed-
eral Register], see §1.263A-8(a)(1) and
§1.263A-9(e)(2) as contained in 26 CFR
part 1, revised April 1, 2019.
* * * * *
§1.381(c)(5)-1 [Amended]
Par. 11. Section 1.381(c)(5)-1 is
amended:
1. In paragraph (a)(6), by designating
Examples 1 and 2 as paragraphs (a)(6)(i)
and (ii), respectively.
2. In newly-designated paragraphs (a)
(6)(i) and (ii), by redesignating the para-
graphs in the first column as the para-
graphs in the second column:
Old ParagraphsNew Paragraphs
(a)(6)(i)(i) and (ii)(a)(6)(i)(A) and (B)
(a)(6)(ii)(i) and (ii)(a)(6)(ii)(A) and (B)
3. In newly designated paragraphs (a)
(6)(ii)(A) and (B), by removing the lan-
guage “small reseller” and adding in its
place the language “small business tax-
payer” everywhere it appears.
Par. 12. §1.446-1 is amended:
1. In paragraph (a)(4)(i), by revising
the first sentence.
2. By revising paragraph (c)(2)(i).
3. By adding paragraph (c)(3).
The revisions and addition read as fol-
lows:
§1.446-1 General rule for methods of
accounting.
(a) * * *
(4) * * *
(i) Except in the case of a taxpayer
qualifying as a small business taxpayer
for the taxable year under section 471(c),
in all cases in which the production, pur-
chase or sale of merchandise of any kind
is an income-producing factor, merchan-
dise on hand (including finished goods,
work in progress, raw materials, and sup-
plies) at the beginning and end of the year
shall be taken into account in computing
the taxable income of the year. * * *
* * * * *
(c) * * *
(2) * * *
(i) In any case in which it is necessary
to use an inventory, the accrual method of
accounting must be used with regard to
purchases and sales unless:
(A) The taxpayer qualifies as a small
business taxpayer for the taxable year un-
der section 471(c), or
(B) Otherwise authorized under para-
graph (c)(2)(ii) of this section.
* * * * *
(3) Applicability date. The first sen-
tence of paragraph (a)(4)(i) of this sec-
tion and paragraph (c)(2)(i) of this section
apply to taxable years beginning on or
after [date the Treasury Decision adopt-
ing these proposed regulations as final is
published in the Federal Register]. For
taxable years beginning before [date the
Treasury Decision adopting these regula-
tions as final is published in the Federal
Register], see §1.446-1(c) as contained in
26 CFR part 1, revised April 1, 2019.
* * * * *
Par. 13. Section1.448-1 is amended by
adding new first and second sentences to
paragraphs (g)(1) and (h)(1) to read as fol-
lows:
§1.448-1 Limitation on the use of the
cash receipts and disbursements method
of accounting.
* * * * *
(g) * * *
(1) * * *The rules provided in para-
graph (g) of this section apply to taxable
years beginning before January 1, 2018.
See §1.448-2 for rules relating to tax-
able years beginning after December 31,
2017.* * *
* * * * *
(h) * * *
(1) * * *The rules provided in para-
graph (h) of this section apply to taxable
years beginning before January 1, 2018.
See §1.448-2 for rules relating to tax-
able years beginning after December 31,
2017.* * *
* * * * *
§1.448-2 [Redesignated as §1.448-3]
Par. 14. Section 1.448-2 is redesignated
as §1.448-3.
Par. 15. A new §1.448-2 is added to
read as follows:
§1.448-2 Limitation on the use of the
cash receipts and disbursements method
of accounting for taxable years beginning
after December 31, 2017.
(a) Limitation on method of account-
ing—(1) In general. The rules of this sec-
tion relate to the limitation on the use of
the cash receipts and disbursements meth-
od of accounting (cash method) by certain
taxpayers applicable for taxable years
beginning after December 31, 2017. For
rules applicable to taxable years begin-
ning before January 1, 2018, see §§1.448-
1 and 1.448-1T.
(2) Limitation rule. Except as other-
wise provided in this section, the compu-
tation of taxable income using the cash
method is prohibited in the case of a:
(i) C corporation;
(ii) Partnership with a C corporation as
a partner, or a partnership that had a C cor-
poration as a partner at any time during the
partnership’s taxable year beginning after
December 31, 1986; or
(iii) Tax shelter.
(3) Treatment of combination meth-
ods—(i) In general. For purposes of this
section, the use of a method of accounting
that records some, but not all, items on the
cash method is considered the use of the
cash method. Thus, a C corporation that
uses a combination of accounting meth-
ods including the use of the cash method
is subject to this section.
(ii) Example. The following example
illustrates the operation of this paragraph
(a)(3). In 2020, A is a C corporation with
average annual gross receipts for the pri-
or three taxable years of greater than $30
million, is not a tax shelter under sec-
tion 448(a)(3) and does not qualify as a
qualified personal service corporation, as
defined in paragraph (e) of this section.
For the last 20 years, A used an accrual
method for items of income and expenses
related to purchases and sales of invento-
ry, and the cash method for items related
to its provision of services. A is using a
combination of accounting methods that

August 17, 2020 458 Bulletin No. 2020–34
include the cash method. Thus, A is sub-
ject to section 448. A is prohibited from
using the cash method for any item for
2020 and is required to change to a per-
missible method.
(b) Definitions. For purposes of this
section—
(1) C corporation—(i) In general.
The term C corporation means any cor-
poration that is not an S corporation (as
defined in section 1361(a)(1)). For exam-
ple, a regulated investment company (as
defined in section 851) or a real estate in-
vestment trust (as defined in section 856)
is a C corporation for purposes of this
section. In addition, a trust subject to tax
under section 511(b) is treated, for pur-
poses of this section, as a C corporation,
but only with respect to the portion of its
activities that constitute an unrelated trade
or business. Similarly, for purposes of this
section, a corporation that is exempt from
Federal income taxes under section 501(a)
is treated as a C corporation only with re-
spect to the portion of its activities that
constitute an unrelated trade or business.
Moreover, for purposes of determining
whether a partnership has a C corporation
as a partner, any partnership described in
paragraph (a)(2)(ii) of this section is treat-
ed as a C corporation. Thus, if partnership
ABC has a partner that is a partnership
with a C corporation, then, for purposes of
this section, partnership ABC is treated as
a partnership with a C corporation partner.
(ii) [Reserved]
(2) Tax shelter—(i) In general. The
term tax shelter means any—
(A) Enterprise, other than a C corpo-
ration, if at any time (including taxable
years beginning before January 1, 1987)
interests in such enterprise have been of-
fered for sale in any offering required to
be registered with any Federal or state
agency having the authority to regulate
the offering of securities for sale;
(B) Syndicate, within the meaning of
paragraph (b)(2)(iii) of this section, or
(C) Tax shelter, within the meaning of
section 6662(d)(2)(C).
(ii) Requirement of registration. For
purposes of paragraph (b)(2)(i)(A) of this
section, an offering is required to be reg-
istered with a Federal or state agency if,
under the applicable Federal or state law,
failure to register the offering would result
in a violation of the applicable Federal or
state law; this rule applies regardless of
whether the offering is in fact registered.
In addition, an offering is required to be
registered with a Federal or state agency
if, under the applicable Federal or state
law, failure to file a notice of exemption
from registration would result in a vio-
lation of the applicable Federal or state
law, regardless of whether the notice is
in fact filed. However, an S corporation is
not treated as a tax shelter for purposes of
section 448(d)(3) or this section merely by
reason of being required to file a notice of
exemption from registration with a state
agency described in section 461(i)(3)(A),
but only if all corporations offering secu-
rities for sale in the state must file such
a notice in order to be exempt from such
registration.
(iii) Syndicate—(A) In general. For
purposes of paragraph (b)(2)(i)(B) of this
section, the term syndicate means a part-
nership or other entity (other than a C cor-
poration) if more than 35 percent of the
losses of such entity during the taxable
year (for taxable years beginning after
December 31, 1986) are allocated to lim-
ited partners or limited entrepreneurs. For
purposes of this paragraph (b)(2)(iii), the
term limited entrepreneur has the same
meaning given such term in section 461(k)
(4). In addition, in determining whether an
interest in a partnership is held by a limit-
ed partner, or an interest in an entity or en-
terprise is held by a limited entrepreneur,
section 461(k)(2) applies in the case of the
trade or business of farming (as defined
in paragraph (d)(2) of this section), and
section 1256(e)(3)(C) applies in all other
cases. Moreover, for purposes of para-
graph (b)(2) of this section, the losses of a
partnership, entity, or enterprise (entities)
means the excess of the deductions al-
lowable to the entities over the amount of
income recognized by such entities under
the entities’ method of accounting used for
Federal income tax purposes (determined
without regard to this section). For this
purpose, gains or losses from the sale of
capital assets or assets described in sec-
tion 1221(a)(2) are not taken into account.
(B) Election to test the allocation of
losses from prior taxable year. For pur-
poses of paragraph (b)(2)(iii)(A) of this
section, to determine if more than 35 per-
cent of the losses of a venture are allocat-
ed to limited partners or limited entrepre-
neurs, instead of using the current taxable
year’s allocation of losses, entities may
elect to use the allocations made in the im-
mediately preceding taxable year instead
of using the current taxable year’s alloca-
tion. An election under this paragraph (b)
(2)(iii)(B) applies to the first taxable year
for which the election is made and to all
subsequent taxable years, unless the Com-
missioner of Internal Revenue or his dele-
gate (Commissioner) permits a revocation
of the election in accordance with this
paragraph. An election under this para-
graph (b)(2)(iii)(B) may never be revoked
earlier than the fifth taxable year follow-
ing the first taxable year for which the
election was made unless extraordinary
circumstances are demonstrated to the
satisfaction of the Commissioner. Once an
election has been revoked, a new election
under this paragraph (b)(2)(iii)(B) cannot
be made until the fifth taxable year follow-
ing the taxable year for which the previous
election was revoked unless extraordinary
circumstances are demonstrated to the sat-
isfaction of the Commissioner. A taxpayer
making this election must attach a state-
ment to its timely filed Federal income tax
return (including extension) that this elec-
tion is made beginning with that taxable
year. If such a statement is not attached,
the election is not valid and has no effect
for any purpose. No late elections will
be permitted. Further, an election cannot
be made by filing an amended Federal
income tax return. In addition to section
448, this election also applies for purpos-
es of all provisions of the Code that refer
to section 448(a)(3) to define tax shelter.
An election made under this paragraph
(b)(2)(iii)(B) may only be revoked with
the written consent of the Commission-
er. Requests for consent must follow the
applicable administrative procedures for
requesting a letter ruling (for example, see
Revenue Procedure 2020-1, 2020-01 IRB
1 (or its successor)).
(C) Example. Taxpayer B is a calen-
dar year limited partnership, with no ac-
tive management from its limited partner.
In 2019, B is profitable and allocates 80
percent of its profits to its general partner
and 20 percent of its profits to its limited
partner. In 2020, B has a loss and allocates
60 percent of losses to its general partner
and 40 percent of its losses to its limited
partner. In 2020 B makes an election un-

Bulletin No. 2020–34 459 August 17, 2020
der paragraph (b)(2)(iii)(B) of this section
to use its prior year allocated amounts.
For 2020, B is not a syndicate because B
is treated as having allocated 20 percent
of its profits to its limited partner in 2020
for purposes of paragraph (b)(2)(iii) of
this section. For 2021, B is a syndicate be-
cause B is treated as having allocated 40
percent of its losses to its limited partner
for purposes of paragraph (b)(2)(iii) of
this section.
(iv) Presumed tax avoidance. For
purposes of (b)(2)(i)(C) of this section,
marketed arrangements in which persons
carrying on farming activities using the
services of a common managerial or ad-
ministrative service will be presumed to
have the principal purpose of tax avoid-
ance if such persons use borrowed funds
to prepay a substantial portion of their
farming expenses (for example, payment
for farm supplies that will not be used or
consumed until a taxable year subsequent
to the taxable year of payment).
(v) Taxable year tax shelter must
change accounting method. A tax shelter
must change from the cash method for the
taxable year that it becomes a tax shelter,
as determined under paragraph (b)(2) of
this section.
(vi) Determination of loss amount. For
purposes of section 448(d)(3), the amount
of losses to be allocated under section
1256(e)(3)(B) is calculated without regard
to section 163(j).
(c) Exception for entities with gross
receipts not in excess of the amount pro-
vided in section 448(c)—(1) In general.
Except in the case of a tax shelter, this sec-
tion does not apply to any C corporation
or partnership with a C corporation as a
partner for any taxable year if such corpo-
ration or partnership (or any predecessor
thereof) meets the gross receipts test of
paragraph (c)(2) of this section.
(2) Gross receipts test—(i) In gener-
al. A corporation meets the gross receipts
test of this paragraph (c)(2) if the average
annual gross receipts of such corporation
for the 3 taxable years (or, if shorter, the
taxable years during which such corpo-
ration was in existence, annualized as
required) ending with such prior taxable
year does not exceed the gross receipts
test amount provided in paragraph (c)(2)
(v) of this section (section 448(c) gross re-
ceipts test). In the case of a C corporation
exempt from Federal income taxes under
section 501(a), or a trust subject to tax
under section 511(b) that is treated as a C
corporation under paragraph (b)(1) of this
section, only gross receipts from the activ-
ities of such corporation or trust that con-
stitute unrelated trades or businesses are
taken into account in determining whether
the gross receipts test is satisfied. A part-
nership with a C corporation as a partner
meets the gross receipts test of paragraph
(c)(2) of this section if the average annual
gross receipts of such partnership for the
3 taxable years (or, if shorter, the taxable
years during which such partnership was
in existence annualized as required) end-
ing with such prior year does not exceed
the gross receipts test amount of para-
graph (c)(2)(v) of this section. Except as
provided in paragraph (c)(2)(ii) of this
section, the gross receipts of the corporate
partner are not taken into account in de-
termining whether a partnership meets the
gross receipts test of paragraph (c)(2) of
this section.
(ii) Aggregation of gross receipts. The
aggregation rules in §1.448-1T(f)(2)(ii)
apply for purposes of aggregating gross
receipts for purposes of this section.
(iii) Treatment of short taxable year.
The short taxable year rules in §1.448-
1T(f)(2)(iii) apply for purposes of this
section.
(iv) Determination of gross receipts.
The determination of gross receipts rules
in §1.448-1T(f)(2)(iv) apply for purposes
of this section.
(v) Gross receipts test amount—(A) In
general. For purposes of paragraph (c) of
this section, the term gross receipts test
amount means $25,000,000, adjusted an-
nually for inflation in the manner provided
in section 448(c)(4). The inflation adjust-
ed gross receipts test amount is published
annually in guidance published in the In-
ternal Revenue Bulletin (see §601.601(d)
(2)(ii) of this chapter).
(B) Example. Taxpayer A, a C corpora-
tion, is a plumbing contractor that installs
plumbing fixtures in customers’ homes
or businesses. A’s gross receipts for the
2017-2019 taxable years are $20 million,
$16 million, and $30 million, respective-
ly. A’s average annual gross receipts for
the three taxable-year period preceding
the 2020 taxable year is $22 million (($20
million + $16 million + $30 million) / 3 =
$22 million. A may use the cash method
for its trade or business for the 2020 tax-
able year because its average annual gross
receipts for the preceding three taxable
years is not more than the gross receipts
test amount of paragraph (c)(2)(vi) of this
section, which is $26 million for 2020.
(d) Exception for farming businesses—
(1) In general. Except in the case of a tax
shelter, this section does not apply to any
farming business. A taxpayer engaged in a
farming business and a separate non-farm-
ing business is not prohibited by this sec-
tion from using the cash method with re-
spect to the farming business, even though
the taxpayer may be prohibited by this
section from using the cash method with
respect to the non-farming business.
(2) Farming business—(i) In general.
For purposes of paragraph (d) of this sec-
tion, the term farming business means—
(A) The trade or business of farming as
defined in section 263A(e)(4) (including
the operation of a nursery or sod farm, or
the raising or harvesting of trees bearing
fruit, nuts or other crops, or ornamental
trees),
(B) The raising, harvesting, or grow-
ing of trees described in section 263A(c)
(5) (relating to trees raised, harvested, or
grown by the taxpayer other than trees
described in paragraph (d)(2)(i)(A) of this
section),
(C) The raising of timber, or
(D) Processing activities which are
normally incident to the growing, raising,
or harvesting of agricultural products.
(ii) Example. Assume a taxpayer is in
the business of growing fruits and vege-
tables. When the fruits and vegetables are
ready to be harvested, the taxpayer picks,
washes, inspects, and packages the fruits
and vegetables for sale. Such activities are
normally incident to the raising of these
crops by farmers. The taxpayer will be
considered to be in the business of farm-
ing with respect to the growing of fruits
and vegetables, and the processing activ-
ities incident to the harvest.
(iii) Processing activities excluded
from farming businesses—(A) In gener-
al. For purposes of this section, a farming
business does not include the processing
of commodities or products beyond those
activities normally incident to the grow-
ing, raising, or harvesting of such prod-
ucts.

August 17, 2020 460 Bulletin No. 2020–34
(B) Examples. (1) Example 1. Assume that a C
corporation taxpayer is in the business of growing
and harvesting wheat and other grains. The taxpay-
er processes the harvested grains to produce breads,
cereals, and similar food products which it sells to
customers in the course of its business. Although the
taxpayer is in the farming business with respect to
the growing and harvesting of grain, the taxpayer is
not in the farming business with respect to the pro-
cessing of such grains to produce breads, cereals,
and similar food products which the taxpayer sells
to customers.
(2) Example 2. Assume that a taxpayer is in the
business of raising livestock. The taxpayer uses the
livestock in a meat processing operation in which the
livestock are slaughtered, processed, and packaged or
canned for sale to customers. Although the taxpayer is
in the farming business with respect to the raising of
livestock, the taxpayer is not in the farming business
with respect to the meat processing operation.
(e) Exception for qualified personal
service corporation. The rules in §1.448-
1T(e) relating to the exception for quali-
fied personal service corporations apply
for taxable years beginning after Decem-
ber 31, 2017.
(f) Effect of section 448 on other pro-
visions. Except as provided in paragraph
(b)(2)(iii)(B) of this section, nothing in
section 448 shall have any effect on the
application of any other provision of law
that would otherwise limit the use of the
cash method, and no inference shall be
drawn from section 448 with respect to
the application of any such provision. For
example, nothing in section 448 affects
the requirement of section 447 that certain
corporations must use an accrual method
of accounting in computing taxable in-
come from farming, or the requirement of
§1.446-1(c)(2) that, in general, an accrual
method be used with regard to purchases
and sales of inventory. Similarly, nothing
in section 448 affects the authority of the
Commissioner under section 446(b) to re-
quire the use of an accounting method that
clearly reflects income, or the requirement
under section 446(e) that a taxpayer secure
the consent of the Commissioner before
changing its method of accounting. For
example, a taxpayer using the cash meth-
od may be required to change to an ac-
crual method of accounting under section
446(b) because such method clearly re-
flects the taxpayer’s income, even though
the taxpayer is not prohibited by section
448 from using the cash method. Similar-
ly, a taxpayer using an accrual method of
accounting that is not prohibited by sec-
tion 448 from using the cash method may
not change to the cash method unless the
taxpayer secures the consent of the Com-
missioner under section 446(e).
(g) Treatment of accounting method
change and rules for section 481(a) ad-
justment—(1) In general. Any taxpayer to
whom section 448 applies must change its
method of accounting in accordance with
the provisions of this paragraph (g). In the
case of any taxpayer required by this sec-
tion to change its method of accounting
for any taxable year, the change shall be
treated as a change initiated by the taxpay-
er. A taxpayer must change to an overall
accrual method of accounting for the first
taxable year the taxpayer is subject to this
section or a subsequent taxable year in
which the taxpayer is newly subject to this
section after previously making a change
in method of accounting that complies
with section 448 (mandatory section 448
year). A taxpayer may have more than one
mandatory section 448 year. For example,
a taxpayer may exceed the gross receipts
test of section 448(c) in non-consecutive
taxable years. If the taxpayer complies
with the provisions of paragraph (g)(3) of
this section for its mandatory section 448
year, the change shall be treated as made
with the consent of the Commissioner.
The change shall be implemented pursu-
ant to the applicable administrative proce-
dures to obtain the automatic consent of
the Commissioner to change a method of
accounting under section 446(e) as pub-
lished in the Internal Revenue Bulletin
(See Revenue Procedure 2015-13, 2015-5
IRB 419 (or successor) (see §601.601(d)
(2) of this chapter)). This paragraph (g)
applies only to a taxpayer who changes
from the cash method as required by this
section. This paragraph (g) does not apply
to a change in method of accounting re-
quired by any Code section (or applicable
regulation) other than this section.
(2) Section 481(a) adjustment. The
amount of the net section 481(a) adjust-
ment and the adjustment period neces-
sary to implement a change in method
of accounting required under this section
are determined under §1.446-1(e) and
the applicable administrative procedures
to obtain the Commissioner’s consent to
change a method of accounting as pub-
lished in the Internal Revenue Bulletin
(see also §601.601(d)(2) of this chapter).
(3) Prior change in overall method of
accounting under this section. A taxpay-
er that otherwise meets the requirements
of paragraph (c) of this section, and that
had during any of the five taxable years
ending with the taxable year changed its
overall method of accounting from the
cash method because it no longer met the
gross receipts test of section 448(c) pro-
vided under paragraph (c) of this section
or because it was a tax shelter as provid-
ed under paragraph (b)(2) of this sec-
tion, may not change its overall method
of accounting back to the cash method
without the written consent of the Com-
missioner. Requests for consent must
follow the applicable administrative pro-
cedures to obtain the written consent of
the Commissioner to change a method of
accounting under section 446(e) as pub-
lished in the Internal Revenue Bulletin
(see also §601.601(d)(2) of this chapter).
For rules relating to the clear reflection
of income and the pattern of consistent
treatment of an item, see section 446 and
§1.446-1.
(h) Applicability dates. The rules of this
section apply for taxable years beginning
on or after [date the Treasury Decision
adopting these proposed regulations as fi-
nal is published in the Federal Register].
Par. 16. Newly redesignated § 1.448-3
is amended by revising paragraphs (a)(2)
and (h) to read as follows:
§1.448-3 Nonaccrual of certain amounts
by service providers.
(a) * * *
(2) The taxpayer meets the gross re-
ceipts test of section 448(c) and §1.448-
1T(f)(2) (in the case of taxable years
beginning before January 1, 2018), or
§1.448-2(c) (in the case of taxable years
beginning after December 31, 2017) for
all prior taxable years.
* * * * *
(h) Applicability dates. (1) Except as
provided in paragraph (h)(2) of this sec-
tion, this section is applicable for taxable
years ending on or after August 31, 2006.
(2) The rules of paragraph (a)(2) of this
section apply for taxable years beginning
on or after [date the Treasury Decision
adopting these proposed regulations as fi-
nal is published in the Federal Register].
For taxable years beginning before [date
the Treasury Decision adopting these reg-
ulations as final is published in the Feder-

Bulletin No. 2020–34 461 August 17, 2020
al Register], see §1.448-2 as contained in
26 CFR part 1, revised April 1, 2019.
Par. 17. Section 1.460-0 is amended by:
1. Adding an entry for §1.460-1(h)(3).
2. Revising the entries for §1.460-3(b)
(3), §1.460-3(b)(3)(i) and (ii), and adding
entries for §1.460-3(b)(3)(ii)(A), (B), (C)
and (D).
3. Removing the entry for §1.460-3(b)
(3)(iii).
4. Adding entries for §1.460-3(d),
§1.460-4(i), and §1.460-6(k).
The additions and revisions read as fol-
lows:
§1.460-0 Outline of regulations under
section 460.
* * * * *
§1.460-1 Long-term contracts.
* * * * *
(h) * * *
(3) Changes made by Tax Cuts and
Jobs Act (Pub. L. 115-97).
* * * * *
§1.460-3 Long-term construction
contracts.
* * * * *
(b) * * *
(3) Gross receipts test of section 448(c)
(i) In general
(ii) Application of gross receipts test
(A) In general
(B) Gross receipts of individuals, etc.
(C) Partners and S corporation share-
holders
(D) Examples
(1) Example 1.
(2) Example 2.
* * * * *
(d) Applicability dates.
§1.460-4 Methods of Accounting for
long-term contracts.
* * * * *
(i) Applicability date.
* * * * *
§1.460-6 Look-back method.
* * * * *
(k) Applicability date.
§ 1.460-1 [Amended]
Par. 18. Section 1.460-1 is amended by
adding three sentences to the end of para-
graph (f)(3) and adding paragraph (h)(3)
to read as follows:
§1.460-1 Long-term contracts.
(f) * * *
(3) * * * A taxpayer may adopt any per-
missible method of accounting for each
classification of contract. Such adoption
is not a change in method of accounting
under section 446 and the accompanying
regulations. For example, a taxpayer that
has had only contracts classified as non-
exempt long-term contracts and has used
the PCM for these contracts may adopt
an exempt contract method in the taxable
year it first enters into an exempt long-
term contract.
* * * * *
(h) * * *
(3) Changes made by Tax Cuts and
Jobs Act (Pub. L. 115-97). Paragraph (f)
(3) of this section, and §1.460-5(d)(1) and
(d)(3), apply for taxable years beginning
on or after [date the Treasury Decision
adopting these proposed regulations as fi-
nal is published in the Federal Register].
* * * * *
Par. 19. Section 1.460-3 is amended by
revising paragraphs (b)(1)(ii) and (b)(3)
and adding paragraph (d) to read as fol-
lows:
§1.460-3 Long-term construction
contracts.
* * * * *
(b) * * *
(1) * * *
(ii) Other construction contract, en-
tered into after December 31, 2017, in a
taxable year ending after December 31,
2017, by a taxpayer, other than a tax shel-
ter prohibited from using the cash receipts
and disbursements method of accounting
(cash method) under section 448(a)(3),
who estimates at the time such contract
is entered into that such contract will be
completed within the 2-year period begin-
ning on the contract commencement date,
and who meets the gross receipts test de-
scribed in paragraph (b)(3) of this section.
* * * * *
(3) Gross receipts test of section
448(c)—(i) In general. A taxpayer, other
than a tax shelter prohibited from using
the cash method under section 448(a)(3),
satisfies the gross receipts test of this para-
graph (b)(3) if it meets the gross receipts
test of section 448(c) and §1.448-2(c)(2).
(ii) Application of gross receipts test—
(A) In general. In the case of any taxpayer
that is not a corporation or a partnership,
and except as provided in paragraphs (b)
(3)(ii)(B) and (C) of this section, the gross
receipts test of section 448(c) and the ac-
companying regulations are applied in the
same manner as if each trade or business
of such taxpayer were a corporation or
partnership.
(B) Gross receipts of individuals, etc.
Except when the aggregation rules of sec-
tion 448(c)(2) apply, the gross receipts
of a taxpayer other than a corporation or
partnership are the amount derived from
all trades or businesses of such taxpayer.
Amounts not related to a trade or busi-
ness are excluded from the gross receipts
the taxpayer. For example, an individual
taxpayer’s gross receipts do not include
inherently personal amounts, such as per-
sonal injury awards or settlements with
respect to an injury of the individual tax-
payer, disability benefits, Social Security
benefits received by the taxpayer during
the taxable year, and wages received as an
employee that are reported on Form W-2.
(C) Partners and S corporation share-
holders. Except when the aggregation
rules of section 448(c)(2) apply, each
partner in a partnership includes a share
of partnership gross receipts in proportion
to such partner’s distributive share (as de-
termined under section 704) of items of
gross income that were taken into account
by the partnership under section 703. Sim-
ilarly, a shareholder includes the pro rata
share of S corporation gross receipts taken
into account by the S corporation under
section 1363(b).
(D) Example. The operation of this
paragraph (b)(3) is illustrated by the fol-
lowing examples:
(1) Example 1. Taxpayer A is an individual who
operates two separate and distinct trades or business
that are reported on Schedule C, Profit or Loss from
Business, of A’s Federal income tax return. For 2020,
one trade or business has annual average gross re-
ceipts of $5 million, and the other trade or business
has average annual gross receipts of $35 million. Un-
der paragraph (b)(3)(ii)(B) of this section, for 2020,
neither of A’s trades or businesses meets the gross
receipts test of paragraph (b)(3) of this section ($5
million + $35 million = $40 million, which is greater

August 17, 2020 462 Bulletin No. 2020–34
than the inflation-adjusted gross receipts test amount
for 2020, which is $26 million).
(2) Example 2. Taxpayer B is an individual who
operates three separate and distinct trades or busi-
ness that are reported on Schedule C of B’s Federal
income tax return. For 2020, Business X is a retail
store with average annual gross receipts of $15 mil-
lion, Business Y is a dance studio with average an-
nual gross receipts of $6 million, and Business Z is
a car repair shop with average annual gross receipts
of $12 million. Under paragraph (b)(3)(ii)(B) of this
section, B’s gross receipts are the combined amount
derived from all three of B’s trades or businesses.
Therefore, for 2020, X, Y and Z do not meet the
gross receipts test of paragraph (b)(3)(i) of this sec-
tion ($15 million + $6 million + $12 million = $33
million, which is greater than the inflation-adjusted
gross receipts test amount for 2020, which is $26
million).
* * * * *
(d) Applicability Dates. Paragraphs (b)
(1)(ii) and (b)(3) of this section apply, for
taxable years beginning on or after [date
the Treasury Decision adopting these pro-
posed regulations as final is published
in the Federal Register]. For contracts
entered into before January 1, 2018, see
§1.460-3(b)(1)(ii) and (b)(3) as contained
in 26 CFR part 1, revised April 1, 2019.
Par. 20. Section 1.460-4 is amended
by revising the first sentence of paragraph
(f)(1) and adding paragraph (i) to read as
follows:
§1.460-4 Methods of Accounting for
long-term contracts.
(f) * * *
(1) * * *Under section 56(a)(3), a tax-
payer subject to the AMT must use the
PCM to determine its AMTI from any
long-term contract entered into on or af-
ter March 1, 1986, that is not a home con-
struction contract, as defined in §1.460–
3(b)(2).* * *
* * * * *
(i) Applicability date. Paragraph (f)(1)
of this section applies for taxable years
beginning on or after [date the Treasury
Decision adopting these proposed regula-
tions as final is published in the Federal
Register]. For taxable years beginning be-
fore January 1, 2018, see §1.460-4(f)(1) as
contained in 26 CFR part 1, revised April
1, 2019.
* * * * *
Par. 21. Section 1.460-5 is amended:
1. In paragraph (d)(1), by remov-
ing the language “(concerning contracts
of homebuilders that do not satisfy the
$10,000,000 gross receipts test described
in §1.460–3(b)(3) or will not be complet-
ed within two years of the contract com-
mencement date)”.
2. By revising paragraph (d)(3).
The revision reads as follows:
§1.460-5 Cost allocation rules.
* * * * *
(d) * * *
(3) Large homebuilders. A taxpayer
must capitalize the costs of home con-
struction contracts under section 263A,
unless the taxpayer estimates, when enter-
ing into the contract, that it will be com-
pleted within two years of the contract
commencement date, and the taxpayer
satisfies the gross receipts test of section
448(c) described in §1.460-3(b)(3) for the
taxable year in which the contract is en-
tered into.
* * * * *
Par. 22. Section 1.460-6 is amended:
1. In paragraph (b)(2) introductory text,
by removing the language “section 460(e)
(4)” and adding in its place the language
“section 460(e)(3)”.
2. By revising the first and last sentenc-
es of paragraph (b)(2)(ii).
3. By designating the undesignated text
after paragraph (b)(3)(ii) as paragraph (b)
(3)(iii).
4. In newly designated paragraph (b)
(3)(iii), by adding a sentence to the end of
the paragraph.
5. In paragraph (c)(1)(i), by revising
the fifth sentence.
6. In paragraph (c)(2)(i), by revising
the third sentence .
7. In paragraph (c)(2)(iv), by revising
the first sentence.
8. In paragraph (c)(3)(ii), by revising
the first sentence.
9. In paragraph (c)(3)(vi), by revising
the first sentence.
10. In paragraph (d)(2)(i), by removing
the language “whether or not the taxpayer
would have been subject to the alternative
minimum tax” and adding in its place the
language “for taxpayers subject to the al-
ternative minimum tax without regard to
whether tentative minimum tax exceeds
regular tax for the redetermination year”.
11. By revising paragraph (d)(4)(i)(A).
12. By designating paragraph (h)(8)(ii)
Example 7 as paragraph (h)(8)(iii).
13. By revising newly designated para-
graph (h)(8)(iii).
14. By adding paragraph (k).
The revisions and additions read as fol-
lows:
§1.460-6 Look-back method.
* * * * *
(b) * * *
(2) * * *
(ii) is not a home construction contract
but is estimated to be completed within a
2–year period by a taxpayer, other than a
tax shelter prohibited from using the cash
receipts and disbursements method of
accounting under section 448(a)(3), who
meets the gross receipts test of section
448(c) and §1.460-3(b)(3) for the taxable
year in which such contract is entered
into. * * *The look-back method, howev-
er, applies to the alternative minimum tax-
able income from a contract of this type,
for those taxpayers subject to the AMT
in taxable years prior to the filing taxable
year in which the look-back method is re-
quired, unless the contract is exempt from
required use of the percentage of comple-
tion method under section 56(a)(3).
(3) * * *
(iii) * * *For contracts entered into af-
ter December 31, 2017, in a taxable year
ending after December 31, 2017, a tax-
payer’s gross receipts are determined in
the manner required by regulations under
section 448(c).
* * * * *
(c)* * *
(1)* * *
(i)* * * Based on this reapplication, the
taxpayer determines the amount of taxable
income (and, when applicable, alternative
minimum taxable income and modified
taxable income under section 59A(c)) that
would have been reported for each year
prior to the filing year that is affected by
contracts completed or adjusted in the fil-
ing year if the actual, rather than estimat-
ed, total contract price and costs had been
used in applying the percentage of com-
pletion method to these contracts, and to
any other contracts completed or adjusted
in a year preceding the filing year. * * *
* * * * *
(2)* * *
(i) * * *The taxpayer then must deter-
mine the amount of taxable income (and,

Bulletin No. 2020–34 463 August 17, 2020
when applicable, alternative minimum
taxable income and modified taxable in-
come under section 59A(c)) that would
have been reported for each affected tax
year preceding the filing year if the per-
centage of completion method had been
applied on the basis of actual contract
price and contract costs in reporting in-
come from all contracts completed or ad-
justed in the filing year and in any preced-
ing year. * * *
* * * * *
(iv)* * * In general, because income
under the percentage of completion meth-
od is generally reported as costs are in-
curred, the taxable income and, when
applicable, alternative minimum taxable
income and modified taxable income un-
der section 59A(c), are recomputed only
for each year in which allocable contract
costs were incurred. * * *
* * * * *
(3)* * *
(ii)* * * Under the method described
in this paragraph (c)(3) (actual method), a
taxpayer first must determine what its reg-
ular and, when applicable, its alternative
minimum tax and base erosion minimum
tax liability would have been for each re-
determination year if the amounts of con-
tract income allocated in Step One for all
contracts completed or adjusted in the fil-
ing year and in any prior year were substi-
tuted for the amounts of contract income
reported under the percentage of com-
pletion method on the taxpayer’s original
return (or as subsequently adjusted on ex-
amination, or by amended return). * * *
* * * * *
(vi)* * *For purposes of Step Two, the
income tax liability must be redetermined
by taking into account all applicable ad-
ditions to tax, credits, and net operating
loss carrybacks and carryovers. Thus, the
taxes, if any, imposed under sections 55
and 59A (relating to alternative and base
erosion minimum tax, respectively) must
be taken into account. * * *
* * * * *
(d) * * *
(4) * * *
(i) * * *
(A) General rule. The simplified
marginal impact method is required to
be used with respect to income report-
ed from domestic contracts by a pass-
through entity that is either a partnership,
an S corporation, or a trust, and that is not
closely held. With respect to contracts
described in the preceding sentence, the
simplified marginal impact method is
applied by the pass-through entity at the
entity level. The pass-through entity de-
termines the amount of any hypothetical
underpayment or overpayment for a re-
determination year using the highest rate
of tax in effect for corporations under
section 11. However, for redetermination
years beginning before January 1, 2018,
the pass-through entity uses the highest
rates of tax in effect for corporations
under section 11 and section 55(b)(1).
Further, the pass-through entity uses the
highest rates of tax imposed on individu-
als under section 1 and section 55(b)(1)
if, at all times during the redetermination
year involved (that is, the year in which
the hypothetical increase or decrease in
income arises), more than 50 percent of
the interests in the entity were held by
individuals directly or through 1 or more
pass-through entities.
* * * * *
(h)* * *
(8)* * *
(iii) Example 7. X, a calendar year C corporation,
is engaged in the construction of real property under
contracts that are completed within a 24-month pe-
riod. Its average annual gross receipts for the prior
3-taxable-year period does not exceed $25,000,000.
As permitted by section 460(e)(1)(B), X uses the
completed contract method (CCM) for regular tax
purposes. However, X is engaged in the construction
of commercial real property and, for years begin-
ning before January 1, 2018, is required to use the
percentage of completion method (PCM) for alter-
native minimum tax (AMT) purposes. Assume that
for 2017, 2018, and 2019, X has only one long-term
contract, which is entered into in 2017 and complet-
ed in 2019 and that in 2017 X’s average annual gross
receipts for the prior 3-taxable-years do not exceed
$10,000,000. Assume further that X estimates gross
income from the contract to be $2,000, total contract
costs to be $1,000, and that the contract is 25 per-
cent complete in 2017 and 70 percent complete in
2018, and 5 percent complete in 2019. In 2019, the
year of completion, gross income from the contract
is actually $3,000, instead of $2,000, and costs are
actually $1,000. Because X was required to use the
PCM for 2017 for AMT purposes, X must apply the
look-back method to its AMT reporting for that year.
X has elected to use the simplified marginal impact
method. For 2017, X’s income using estimated con-
tract price and costs is as follows:
Table 1 to paragraph (h)(8)(iii)
Estimates 2017
Gross Income $500 = ($2,000 x 25%)
Deductions $(250) = ($1,000 x 25%)
Contract Income–PCM $250
(A) When X files its federal income tax return
for 2019, the contract completion year, X applies the
look-back method. For 2017, X’s income using actu-
al contract price and costs is as follows:
Table 2 to paragraph (h)(8)(iii)(A)
Actual 2017
Gross Income $750 = ($3,000 x 25%)
Deductions $(250) = ($1,000 x 25%)
Contract Income–PCM $500
(B) Accordingly, the reallocation of contract
income under the look-back method results in an
increase of income for AMT purposes for 2017 of
$250 ($500-$250). Under the simplified marginal
impact method, X applies the highest rate of tax un-
der section 55(b)(1) to this increase, which produces
a hypothetical underpayment for 2017 of $50 (.20 x
$250). Interest is charged to X on this $50 underpay-
ment from the due date of X’s 2017 return until the
due date of X’s 2019 return. X, a C corporation, is
not subject to the AMT in 2018. X does not compute
alternative minimum taxable income or use the PCM
in that year. Accordingly, look-back does not apply
to 2018.
* * * * *
(k) Applicability date. Paragraphs (b)
(2), (b)(2)(ii), (b)(3)(ii), (c)(1)(i), (c)(2)
(i), (c)(2)(iv), (c)(3)(ii), (c)(3)(vi), (d)
(2)(i), (d)(4)(i)(A), and (h)(8)(iii) of this
section, apply for taxable years beginning
on or after [date the Treasury decision
adopting these proposed regulations as fi-
nal is published in the Federal Register].
For taxable years beginning before Janu-
ary 1, 2018, see §§1.460-6(b)(2), 1.460-
6(b)(2)(ii), 1.460-6(b)(3)(ii), 1.460-6(c)
(1)(i), 1.460-6(c)(2)(i) and (iv), 1.460-
6(c)(3)(ii) and (vi), 1.460-6(d)(2)(i),
1.460-6(d)(4)(i)(A), and 1.460-6(h)(8)
(iii) as contained in 26 CFR part 1, re-
vised April 1, 2019.
Par. 23. §1.471-1 is amended by:
1. Designating the undesignated para-
graph as paragraph (a).
2. Adding a heading to newly desig-
nated paragraph (a) and revising the first
sentence.
3. Adding paragraph (b).
The revision and addition read as fol-
lows:
§1.471-1 Need for inventories.
(a) In general. Except as provided in
paragraph (b) of this section, in order to
reflect taxable income correctly, inven-
tories at the beginning and end of each
taxable year are necessary in every case
in which the production, purchase, or sale
of merchandise is an income-producing
factor. * * *

August 17, 2020 464 Bulletin No. 2020–34
(b) Exemption for certain small busi-
ness taxpayers—(1) In general. Paragraph
(a) of this section shall not apply to a tax-
payer, other than a tax shelter prohibited
from using the cash receipts and disburse-
ments method of accounting (cash meth-
od) under section 448(a)(3), in any tax-
able year if the taxpayer meets the gross
receipts test provided in paragraph (b)(2)
of this section, and uses as a method of
accounting for its inventory a method that
is described in paragraph (b)(3) of this
section.
(2) Gross receipts test—(i) In general.
A taxpayer, other than a tax shelter pro-
hibited from using the cash method under
section 448(a)(3), meets the gross receipts
test of paragraph (b)(1) of this section if
it meets the gross receipts test of section
448(c) and §1.448-2(c). The gross receipts
test applies to determine whether a tax-
payer is eligible to use the exemption pro-
vided in paragraph (b) of this section even
if the taxpayer is not otherwise subject to
section 448(a).
(ii) Application of the gross receipts
test—(A) In general. In the case of any
taxpayer that is not a corporation or part-
nership, and except as otherwise provided
in paragraphs (b)(2)(ii)(B) and (C) of this
section, the gross receipts test of section
448(c) and the accompanying regulations
are applied in the same manner as each
trade or business of the taxpayer were a
corporation or partnership.
(B) Gross receipts of individuals, etc.
Except when the aggregation rules of sec-
tion 448(c)(2) apply, the gross receipts
of a taxpayer other than a corporation or
partnership are the amount derived from
all trades or businesses of such taxpayer.
Amounts not related to a trade or business-
es are excluded from the gross receipts of
the taxpayer. For example, an individual
taxpayer’s gross receipts do not include
inherently personal amounts, such as: per-
sonal injury awards or settlements with
respect to an injury of the individual tax-
payer, disability benefits, Social Security
benefits received by the taxpayer during
the taxable year, and wages received as an
employee that are reported on Form W-2.
(C) Partners and S corporation share-
holders—(1) In general. Except when the
aggregation rules of section 448(c)(2) ap-
ply, each partner in a partnership includes
a share of the partnership’s gross receipts
in proportion to such partner’s distributive
share (as determined under section 704) of
items of gross income that were taken into
account by the partnership under section
703. Similarly, a shareholder includes the
pro rata share of S corporation gross re-
ceipts taken into account by the S corpo-
ration under section 1363(b).
(2) [Reserved]
(D) Examples. The operation of this
paragraph (b)(2) is illustrated by the fol-
lowing examples:
(1) Example 1. Taxpayer A, a calendar year S
corporation, is a reseller and maintains inventories.
In 2017, 2018, and 2019, S’s gross receipts were $10
million, $11 million, and $13 million respectively. A
is not prohibited from using the cash method under
section 448(a)(3). For 2020, A meets the gross re-
ceipts test of paragraph (b)(2) of this section.
(2) Example 2. Taxpayer B operates two separate
and distinct trades or businesses that are reported on
Schedule C, Profit or Loss from Business, of B’s Fed-
eral income tax return. For 2020, one trade or busi-
ness has annual average gross receipts of $5 million,
and the other trade or business has average annual
gross receipts of $35 million. Under paragraph (b)(2)
(ii)(B) of this section, for 2020, neither of B’s trades
or businesses meets the gross receipts test of para-
graph (b)(2) of this section ($5 million + $35 million
= $40 million, which is greater than the inflation-ad-
justed gross receipts test amount for 2020, which is
$26 million).
(3) Example 3. Taxpayer C is an individual who
operates three separate and distinct trades or busi-
ness that are reported on Schedule C of C’s Federal
income tax return. For 2020, Business X is a retail
store with average annual gross receipts of $15 mil-
lion, Business Y is a dance studio with average an-
nual gross receipts of $6 million, and Business Z is
a car repair shop with average annual gross receipts
of $12 million. Under paragraph (b)(2)(ii)(B) of this
section, C’s gross receipts are the combined amount
derived from all three of C’s trades or businesses.
Therefore, for 2020, X, Y and Z do not meet the
gross receipts test of paragraph (b)(2)(i) of this sec-
tion ($15 million + $6 million + $12 million = $33
million, which is greater than the inflation-adjusted
gross receipts test amount for 2020, which is $26
million).
(3) Methods of accounting under the
small business taxpayer exemption. A tax-
payer eligible to use, and that chooses to
use, the exemption described in paragraph
(b) of this section may account for its in-
ventory by either:
(i) Accounting for its inventory items
as non-incidental materials and supplies,
as described in paragraph (b)(4) of this
section; or
(ii) Using the method for each item that
is reflected in the taxpayer’s applicable
financial statement (AFS) (AFS section
471(c) inventory method); or, if the tax-
payer does not have an AFS for the tax-
able year, the books and records of the
taxpayer prepared in accordance with the
taxpayer’s accounting procedures, as de-
fined in paragraph (b)(6)(ii) of this section
(non-AFS section 471(c) inventory meth-
od).
(4) Inventory treated as non-inciden-
tal materials and supplies—(i) In gen-
eral. Inventory treated as non-incidental
materials and supplies (section 471(c)
materials and supplies) is recovered
through costs of goods sold only in the
taxable year in which such inventory is
actually used or consumed in the tax-
payer’s business, or in the taxable year
in which the taxpayer pays for or incurs
the costs of the items, whichever is later.
Section 471 materials and supplies are
used or consumed in the taxable year in
which the taxpayer provides the items to
its customer. Inventory treated as non-in-
cidental materials and supplies under this
paragraph (b)(4) is not eligible for the
de minimis safe harbor election under
§1.263(a)-1(f)(2).
(ii) Identification and valuation of
section 471(c) materials and supplies. A
taxpayer may determine the amount of the
section 471(c) materials and supplies that
are recoverable through costs of goods
sold by using either a specific identifica-
tion method, a first-in, first-out (FIFO)
method, or an average cost method, pro-
vided that method is used consistently.
See §1.471-2(d). A taxpayer that uses the
section 471 materials and supplies method
may not use any other method described
in the regulations under section 471, or the
last-in, first-out (LIFO) method described
in section 472 and the accompanying reg-
ulations, to either identify section 471(c)
materials and supplies, or to value those
section 471(c) materials and supplies. The
inventory costs includible in the section
471(c) materials and supplies method are
the direct costs of the property produced
or property acquired for resale. However,
an inventory cost does not include a cost
for which a deduction would be disal-
lowed, or that is not otherwise recoverable
but for paragraph (b)(4) of this section, in
whole or in part, under a provision of the
Internal Revenue Code.
(iii) Allocation methods. The section
471 materials and supplies method may
allocate the costs of such inventory items

Bulletin No. 2020–34 465 August 17, 2020
by using specific identification or using
any reasonable method.
(iv) Example. Taxpayer D is a baker
that reports its baking trade or business on
Schedule C, Profit or Loss From Business,
of the Form 1040, Individual Tax Return,
and D’s baking business has average an-
nual gross receipts for the 3-taxable years
prior to 2019 of less than $100,000. D
meets the gross receipts test of section
448(c) and is not prohibited from using
the cash method under section 448(a)(3)
in 2019. Therefore, D qualifies as a small
business taxpayer under paragraph (b)(2)
of this section. D uses the overall cash
method, and the section 471(c) non-inci-
dental materials and supplies method. D
purchases $50 of peanut butter in Novem-
ber 2019. In December 2019, D uses all of
the peanut butter to bake cookies available
for immediate sale. D sells the peanut but-
ter cookies to customers in January 2020.
The peanut butter cookies are used or con-
sumed under paragraph (b)(4)(i) of this
section in January 2020 when the cookies
are sold to customers, and D may recover
the cost of the peanut butter in 2020.
(5) AFS section 471(c) method—(i) In
general. A taxpayer that meets the gross
receipts test described in paragraph (b)
(2) of this section and that has an AFS for
such taxable year may use the AFS section
471(c) method described in this paragraph
to account for its inventory costs for the
taxable year. For purposes of the AFS sec-
tion 471(c) method, an inventory cost is a
cost that a taxpayer capitalizes to property
produced or property acquired for resale
in its AFS. However, an inventory cost
does not include a cost that is neither de-
ductible nor otherwise recoverable but for
paragraph (b)(5) of this section, in whole
or in part, under a provision of the Inter-
nal Revenue Code (for example, section
162(c), (e), (f), (g), or 274). In lieu of the
inventory method described in section
471(a), a taxpayer using the AFS section
471(c) method recovers its inventory costs
in accordance with the inventory method
used in its AFS.
(ii) Definition of AFS. The term AFS
is defined in section 451(b)(3) and the ac-
companying regulations. See §1.451-3(c)
(1). The rules relating to additional AFS
issues provided in §1.451-3(h) apply to
the AFS section 471(c) method. A taxpay-
er has an AFS for the taxable year if all of
the taxpayer’s taxable year is covered by
an AFS.
(iii) Timing of inventory costs. Not-
withstanding the timing rules used in
the taxpayer’s AFS, the amount of any
inventoriable cost may not be capital-
ized or otherwise taken into account for
Federal income tax purposes any earlier
than the taxable year during which the
amount is paid or incurred under the tax-
payer’s overall method of accounting, as
described in §1.446-1(c)(1). For example,
in the case of an accrual method taxpay-
er, inventoriable costs must satisfy the all
events test, including economic perfor-
mance, of section 461. See §1.446-1(c)(1)
(ii) and section 461 and the accompanying
regulations.
(iv) Example. H is a calendar year C
corporation that is engaged in the trade
or business of selling office supplies and
providing copier repair services. H meets
the gross receipts test of section 448(c)
and is not prohibited from using the cash
method under section 448(a)(3) for 2019
or 2020. For Federal income tax purposes,
H chooses to account for purchases and
sales of inventory using an accrual meth-
od of accounting and for all other items
using the cash method. For AFS purposes,
H uses an overall accrual method of ac-
counting. H uses the AFS section 471(c)
method of accounting. In H’s 2019 AFS,
H incurred $2 million in purchases of of-
fice supplies held for resale and recovered
the $2 million as cost of goods sold. On
January 5, 2020, H makes payment on
$1.5 million of these office supplies. For
purposes of the AFS section 471(c) meth-
od of accounting, H can recover the $2
million of office supplies in 2019 because
the amount has been included in cost of
goods sold in its AFS inventory method
and section 461 has been satisfied.
(6) Non-AFS section 471(c) method—
(i) In general. A taxpayer that meets the
gross receipts test described in paragraph
(b)(2) of this section for a taxable year
and that does not have an AFS, as defined
in paragraph (b)(5)(ii) of this section, for
such taxable year may use the non-AFS
section 471(c) method to account for its
inventories for the taxable year in accor-
dance with this paragraph (b)(6). The
non-AFS section 471(c) method is the
method of accounting used for inventory
in the taxpayer’s books and records that
properly reflect its business activities for
non-tax purposes and are prepared in ac-
cordance with the taxpayer’s accounting
procedures. For purposes of the non-AFS
section 471(c) method, an inventory cost
is a cost that the taxpayer capitalizes to
property produced or property acquired
for resale in its books and records, except
as provided in paragraph (b)(6)(ii) of this
section. In lieu of the inventory method
described in section 471(a), a taxpayer
using the non-AFS section 471(c) method
recovers its costs through its book inven-
tory method of accounting. A taxpayer that
has an AFS for such taxable year may not
use the non-AFS section 471(c) method.
(ii) Timing and amounts of costs. Not-
withstanding the timing of costs reflected
in the taxpayer’s books and records, a tax-
payer may not deduct or recover any costs
that have not been paid or incurred under
the taxpayer’s overall method of account-
ing, as described in §1.446-1(c)(1), or
that are neither deductible nor otherwise
recoverable but for the application of this
paragraph (b)(6), in whole or in part, under
a provision of the Internal Revenue Code
(for example, section 162(c), (e), (f), (g)
or 274). For example, in the case of an ac-
crual method taxpayer or a taxpayer using
an accrual method for purchases and sales,
inventory costs must satisfy the all events
test, including economic performance, un-
der section 461(h). See §1.446-1(c)(1)(ii),
and section 461 and the accompanying
regulations.
(iii) Examples. The following exam-
ples illustrate the rules of paragraph (b)(6)
of this section.
(A) Example 1. Taxpayer E is a C corporation
that is engaged in the retail trade or business of sell-
ing beer, wine, and liquor. In 2019, E has average
annual gross receipts for the prior 3-taxable-years of
less than $15 million, and is not otherwise prohibited
from using the cash method under section 448(a)(3).
E does not have an AFS for the 2019 taxable year. E
is eligible to use the non-AFS section 471(c) method
of accounting. E uses the overall cash method, and
the non-AFS section 471(c) method of accounting
for Federal income tax purposes. In E’s electronic
bookkeeping software, E treats all costs paid during
the taxable year as presently deductible. As part of its
regular business practice, E’s employees take a phys-
ical count of inventory on E’s selling floor and its
warehouse on December 31, 2019, and E also makes
representations to its creditor of the amount of in-
ventory on hand for specific categories of product it
sells. E may not expense all of its costs paid during
the 2019 taxable year because its books and records
do not accurately reflect the inventory records used
for non-tax purposes in its regular business activity.

August 17, 2020 466 Bulletin No. 2020–34
E must use the physical inventory count taken at the
end of 2019 to determine its ending inventory. E may
include in cost of goods sold for 2019 those inven-
tory costs that are not properly allocated to ending
inventory.
(B) Example 2. F is a C corporation that is en-
gaged in the manufacture of baseball bats. In 2019, F
has average annual gross receipts for the prior 3-tax-
able-years of less than $25 million, and is not other-
wise prohibited from using the cash method under
section 448(a)(3). F does not have an AFS for the
2019 taxable year. For Federal income tax purposes,
F uses the overall cash method of accounting, and the
non-AFS section 471(c) method of accounting. For
its books and records, F uses an overall accrual meth-
od and maintains inventories. In December 2019, F’s
financial statements show $500,000 of direct and in-
direct material costs. F pays its supplier in January
2020. Under paragraph (b)(6)(ii) of this section, F re-
covers its direct and indirect material costs in 2020.
(7) Effect of section 471(c) on oth-
er provisions. Nothing in section 471(c)
shall have any effect on the application
of any other provision of law that would
otherwise apply, and no inference shall be
drawn from section 471(c) with respect
to the application of any such provision.
For example, a taxpayer that includes
inventory costs in its AFS is required to
satisfy section 461 before such cost can
be included in cost of goods sold for the
taxable year. Similarly, nothing in section
471(c) affects the requirement under sec-
tion 446(e) that a taxpayer secure the con-
sent of the Commissioner before changing
its method of accounting. If an item of in-
come or expense is not treated consistent-
ly from year to year, that treatment may
not clearly reflect income, notwithstand-
ing the application of this section.
(8) Method of accounting. A change
in the method of treating inventory under
this paragraph (b) is a change in method of
accounting under section 446 and the ac-
companying regulations. A taxpayer may
change its method of accounting only with
the consent of the Commissioner as re-
quired under section 446(e) and §1.446-1.
For example, if a taxpayer is using the AFS
section 471(c) method or non-AFS section
471(c) method, and that taxpayer changes
the method of accounting for inventory in
its AFS, or its books and records, respec-
tively, is required to secure the consent of
the Commissioner before using this new
method for Federal income tax purposes.
However, a change from having an AFS
to not having an AFS, or vice versa, with-
out a change in the underlying method for
inventory for financial reporting purposes
is not a change in method of accounting
under section 446(e). For rules relating to
the clear reflection of income and the pat-
tern of consistent treatment of an item, see
section 446 and §1.446-1.
(c) Applicability dates. This section
applies for taxable years beginning on or
after [date the Treasury Decision adopt-
ing these proposed regulations as final is
published in the Federal Register]. For
taxable years beginning before January
1, 2018, see §1.471-1 as contained in 26
CFR part 1, revised April 1, 2019.
Sunita Lough
Deputy Commissioner of Services and
Enforcement.
(Filed by the Office of the Federal Register on July
30, 2020, 4:15 p.m., and published in the issue of the
Federal Register for August 5, 2020, 85 F.R. 47508)

Bulletin No. 2020–34 i August 17, 2020
Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).
Clarified is used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion. It
is not used where a position in a prior rul-
ing is being changed.
Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transactions.
This term is most commonly used in a ruling
that lists previously published rulings that
are obsoleted because of changes in laws or
regulations. A ruling may also be obsoleted
because the substance has been included in
regulations subsequently adopted.
Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the sub-
stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previous-
ly published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cas-
es in litigation, or the outcome of a Ser-
vice study.
Abbreviations
The following abbreviations in current use
and formerly used will appear in material
published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.

August 17, 2020 ii Bulletin No. 2020–34
Numerical Finding List
1
Bulletin 2020–34
Announcements:
2020-8, 2020-32 I.R.B. 244
2020-9, 2020-32 I.R.B. 244
2020-10, 2020-33 I.R.B. 385
2020-11, 2020-33 I.R.B. 385
Notices:
2020-43, 2020-27 I.R.B. 1
2020-45, 2020-27 I.R.B. 3
2020-46, 2020-27 I.R.B. 7
2020-47, 2020-27 I.R.B. 7
2020-49, 2020-27 I.R.B. 8
2020-50, 2020-28 I.R.B. 35
2020-48, 2020-29 I.R.B. 72
2020-51, 2020-29 I.R.B. 73
2020-52, 2020-29 I.R.B. 79
2020-53, 2020-30 I.R.B. 151
2020-54, 2020-31 I.R.B. 226
2020-56, 2020-32 I.R.B. 239
2020-57, 2020-32 I.R.B. 240
2020-58, 2020-34 I.R.B. 419
Proposed Regulations:
REG-119307-19, 2020-28 I.R.B. 44
REG-112339-19, 2020-30 I.R.B. 155
REG-117589-18, 2020-30 I.R.B. 184
REG-125716-18, 2020-30 I.R.B. 197
REG-123027-19, 2020-31 I.R.B. 229
REG-130081-19, 2020-32 I.R.B. 246
REG-127732-19, 2020-33 I.R.B. 385
REG-111879-20, 2020-34 I.R.B. 421
REG-112042-19, 2020-34 I.R.B. 422
REG-132766-18, 2020-34 I.R.B. 436
Revenue Procedures:
2020-16, 2020-27 I.R.B. 10
2020-31, 2020-27 I.R.B. 12
2020-35, 2020-29 I.R.B. 82
2020-36, 2020-32 I.R.B. 243
2020-37, 2020-33 I.R.B. 381
Revenue Rulings:
2020-14, 2020-28 I.R.B. 33
2020-15, 2020-32 I.R.B. 233
Treasury Decisions:
9899, 2020-29 I.R.B. 62
9900, 2020-30 I.R.B. 143
9903, 2020-32 I.R.B. 235
Treasury Decisions:—Continued
9901, 2020-33 I.R.B. 266
9902, 2020-33 I.R.B. 349
9904, 2020-34 I.R.B. 413
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2019–27 through 2019–52 is in Internal Revenue Bulletin
2019–52, dated December 27, 2019.

Bulletin No. 2020–34 iii August 17, 2020
Finding List of Current Actions on
Previously Published Items
1
Bulletin 2020–34
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2019–27 through 2019–52 is in Internal Revenue Bulletin
2019–52, dated December 27, 2019.

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