§471 General rule for inventories

Summary

When the Secretary decides that taking inventories is needed to figure a taxpayer’s income correctly, the taxpayer must take inventories in the way the Secretary requires. That way must follow good accounting practice for the business and must show income clearly. A method that uses estimated inventory shrinkage is allowed even if a physical count is done after the tax year ends, as long as the taxpayer normally counts inventory regularly at each location and corrects the estimates when the actual shrinkage is known. If a taxpayer (except a tax shelter barred from using the cash method under section 448(a)(3)) meets the gross receipts test of section 448(c) for a year, the Secretary’s inventory rule in the first paragraph does not apply for that year. For that year the taxpayer’s inventory method is acceptable if it treats inventory as non-incidental materials and supplies, or if it follows the method shown on an applicable financial statement (see section 451(b)(3)), or, if there is no such statement, the taxpayer’s own books and records. For non-corporations and non-partnerships, the gross receipts test is applied as if each trade or business were a corporation or partnership. Any change made under this rule is treated as started by the taxpayer and made with the Secretary’s consent for section 481 purposes. Rules on capitalizing costs are in section 263A.