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Changes in Store for U.S. Taxpayers' Inventory Calculation - by Ron Maiorano 

Global Tax Adviser

 

December 11, 2012

 

Ron Maiorano
Toronto, U.S. Corporate Tax

 

The Treasury Department and the IRS have released regulations to generally prohibit the use of negative amounts in computing additional costs for purposes of the simplified methods of accounting under the section 263A uniform capitalization (UNICAP) rules (subject to certain exceptions).  Until the regulations are issued in final form, taxpayers using the simplified production method may want to rely on existing guidance, which does not prohibit the removal of negative costs from ending inventory by treating them as negative additional section 263A costs.

Background
The section 263A UNICAP rules generally require the capitalization of direct costs and indirect costs that directly benefit or are incurred by reason of the performance of production or resale activities.

 

The UNICAP rules, which determine whether indirect costs that would otherwise be deductible as period costs should retain that treatment or be capitalized, generally differ from the rules governing inventory capitalization for financial statement purposes in both the type and amount of costs required to be inventoried (generally considered synonymous with section 471 costs). Typical differences arising under the UNICAP rules relate to purchasing costs, storage and handling costs, and general and administrative costs that benefit the manufacturing or resale function, as well as book-to-tax differences related to inventoriable costs.

 

Section 263A generally requires taxpayers to allocate capitalizable section 263A costs to inventory. Taxpayers can do so using a facts-and-circumstances allocation method, such as the specific identification method, burden rate, standard cost method, or any other method to allocate direct and indirect costs to units of property produced or acquired for resale, if the method is reasonable. Alternatively, the regulations authorize taxpayers to use a simplified method to allocate costs to eligible property produced or eligible property acquired for resale in lieu of a facts-and-circumstances allocation method. The simplified methods are intended to reduce the complexity and administrative burden of capitalizing into inventory additional costs for tax purposes.

 

For more information, contact your KPMG adviser.

 

Information is current to December 11, 2012. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500