# 26 U.S.C. § 471: General rule for inventories Source: OLRC release point 119-134 . Cite pinpoints as 26 U.S.C. § 471(a)(1). ## § 471(a) General rule Whenever in the opinion of the Secretary the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer on such basis as the Secretary may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income. ## § 471(b) Estimates of inventory shrinkage permitted A method of determining inventories shall not be treated as failing to clearly reflect income solely because it utilizes estimates of inventory shrinkage that are confirmed by a physical count only after the last day of the taxable year if— **§ 471(b)(1)** the taxpayer normally does a physical count of inventories at each location on a regular and consistent basis, and **§ 471(b)(2)** the taxpayer makes proper adjustments to such inventories and to its estimating methods to the extent such estimates are greater than or less than the actual shrinkage. ## § 471(c) Exemption for certain small businesses **§ 471(c)(1) In general.** In the case of any taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3)) which meets the gross receipts test of section 448(c) for any taxable year— **§ 471(c)(1)(A)** subsection (a) shall not apply with respect to such taxpayer for such taxable year, and **§ 471(c)(1)(B)** the taxpayer’s method of accounting for inventory for such taxable year shall not be treated as failing to clearly reflect income if such method either— **§ 471(c)(1)(B)(i)** treats inventory as non-incidental materials and supplies, or **§ 471(c)(1)(B)(ii)** conforms to such taxpayer’s method of accounting reflected in an applicable financial statement of the taxpayer with respect to such taxable year or, if the taxpayer does not have any applicable financial statement with respect to such taxable year, the books and records of the taxpayer prepared in accordance with the taxpayer’s accounting procedures. **§ 471(c)(2) Applicable financial statement.** For purposes of this subsection, the term “applicable financial statement” has the meaning given the term in section 451(b)(3). **§ 471(c)(3) Application of gross receipts test to individuals, etc..** In the case of any taxpayer which is not a corporation or a partnership, the gross receipts test of section 448(c) shall be applied in the same manner as if each trade or business of such taxpayer were a corporation or partnership. **§ 471(c)(4) Coordination with section 481.** Any change in method of accounting made pursuant to this subsection shall be treated for purposes of section 481 as initiated by the taxpayer and made with the consent of the Secretary. ## § 471(d) Cross reference For rules relating to capitalization of direct and indirect costs of property, see section 263A. ## Regulations - [Treas. Reg. § 1.471-1](/26/reg/1.471-1.md): Need for inventories. (interprets § 471) - [Treas. Reg. § 1.471-2](/26/reg/1.471-2.md): Valuation of inventories. (interprets § 471) - [Treas. Reg. § 1.471-3](/26/reg/1.471-3.md): Inventories at cost. (interprets § 471) - [Treas. Reg. § 1.471-4](/26/reg/1.471-4.md): Inventories at cost or market, whichever is lower. (interprets § 471) - [Treas. Reg. § 1.471-5](/26/reg/1.471-5.md): Inventories by dealers in securities. (interprets § 471) - [Treas. Reg. § 1.471-6](/26/reg/1.471-6.md): Inventories of livestock raisers and other farmers. (interprets § 471) - [Treas. Reg. § 1.471-7](/26/reg/1.471-7.md): Inventories of miners and manufacturers. (interprets § 471) - [Treas. Reg. § 1.471-8](/26/reg/1.471-8.md): Inventories of retail merchants. (interprets § 471) - [Treas. Reg. § 1.471-9](/26/reg/1.471-9.md): Inventories of acquiring corporations. (interprets § 471) - [Treas. Reg. § 1.471-10](/26/reg/1.471-10.md): Applicability of long-term contract methods. (interprets § 471) - [Treas. Reg. § 1.471-11](/26/reg/1.471-11.md): Inventories of manufacturers. (interprets § 471) ## Forms named in the regulations - [Form 3115](https://www.irs.gov/pub/irs-pdf/f3115.pdf) - [Form 1040](https://www.irs.gov/pub/irs-pdf/f1040.pdf) - [Form W-2](https://www.irs.gov/pub/irs-pdf/fw2.pdf) ## Final rules - [86 FR 254](https://www.federalregister.gov/documents/2021/01/05/2020-28888/small-business-taxpayer-exceptions-under-sections-263a-448-460-and-471) (2021): Small Business Taxpayer Exceptions Under Sections 263A, 448, 460 and 471 - [83 FR 58476](https://www.federalregister.gov/documents/2018/11/20/2018-24545/allocation-of-costs-under-the-simplified-methods) (2018): Allocation of Costs Under the Simplified Methods - [79 FR 48034](https://www.federalregister.gov/documents/2014/08/15/2014-19275/retail-inventory-method) (2014): Retail Inventory Method - [79 FR 2094](https://www.federalregister.gov/documents/2014/01/13/2014-00327/sales-based-royalties-and-vendor-allowances) (2014): Sales-Based Royalties and Vendor Allowances - [67 FR 65697](https://www.federalregister.gov/documents/2002/10/28/02-27158/unit-livestock-price-method) (2002): Unit Livestock Price Method - [66 FR 2219](https://www.federalregister.gov/documents/2001/01/11/01-6/accounting-for-long-term-contracts) (2001): Accounting for Long-Term Contracts - [65 FR 50638](https://www.federalregister.gov/documents/2000/08/21/00-21103/rules-for-property-produced-in-a-farming-business) (2000): Rules for Property Produced in a Farming Business - [62 FR 44542](https://www.federalregister.gov/documents/1997/08/22/97-21772/rules-for-property-produced-in-a-farming-business) (1997): Rules for Property Produced in a Farming Business ## Leading cases - [Thor Power Tool Co. v. Commissioner, 439 U.S. 522 (1979)](https://www.courtlistener.com/opinion/109974/thor-power-tool-co-v-commissioner/) - [Homes by Ayres v. Commissioner, 795 F.2d 832 (9th Cir. 1986)](https://www.courtlistener.com/opinion/473094/homes-by-ayres-v-commissioner-of-internal-revenue/) - [Thomas v. Commissioner, 92 T.C. 206 (1989)](https://www.courtlistener.com/opinion/4706894/thomas-v-commissioner/) ## Proposed regulations (not in force) - [Prop. Treas. Reg. § 1.471-12](/26/prop/1.471-12_99-1787.md): Nonfinancial customer paper. (REG-104924-98, proposed 1999-01-28) ## Connections Cites: § 263A Capitalization and inclusion in inventory costs of certain expenses; § 448 Limitation on use of cash method of accounting; § 451 General rule for taxable year of inclusion; § 481 Adjustments required by changes in method of accounting Cited by: § 170 Charitable, etc., contributions and gifts; § 312 Effect on earnings and profits; § 472 Last-in, first-out inventories; § 1363 Effect of election on corporation Derived from: 1939 § 22(c) ## Amendments - 1954-08-16: [Act Aug. 16, 1954, ch. 736](/26/act/1954-ch736.md), 68A Stat. 159 - 1976-10-04: [Pub. L. 94-455](/26/act/94-455.md), 90 Stat. 1834 - 1986-10-22: [Pub. L. 99-514](/26/act/99-514.md), 100 Stat. 2356 - 1997-08-05: [Pub. L. 105-34](/26/act/105-34.md), 111 Stat. 891 - 2017-12-22: [Pub. L. 115-97](/26/act/115-97.md), 131 Stat. 2103