Rev. Proc. 2014-33 - Changes to method of accounting for sales-based royalties and vendor allowances 

May 6: The IRS today released an advance copy of Rev. Proc. 2014-33 providing the exclusive procedures by which a taxpayer may obtain the consent of the Commissioner to:
  • Change the method of accounting for royalties as described in Reg.
    section 1.263A-1(e)(3)(ii)(U)(2)
  • Change the method of accounting for sales-based vendor chargebacks described in Reg. section 1.471-3(e)(1)
  • Change its simplified production method or simplified resale method for costs allocated only to inventory property that has been sold, to comply with final regulations under sections 263A and 471

Read Rev. Proc. 2014-33 [PDF 33 KB]

Background

Regulations (T.D. 9652) finalized earlier this year concerned the rules for: (1) capitalization and allocation of royalties incurred only upon the sale of property produced or property acquired for resale (sales-based royalties); and (2) adjusting the cost of merchandise inventory for an allowance, discount or price rebate based on merchandise sales(sales-based vendor chargebacks).


The final regulations reserved rules addressing other types of sales-based vendor allowances.


The final regulations also included changes to the simplified production method and the simplified resale method of allocating capitalized costs between ending inventory and cost of goods sold.


The final regulations apply to tax years ending on or after January 13, 2014.


Read TaxNewsFlash-United States (January 10, 2014).

Rev. Proc. 2014-33

As described more fully below, Rev. Proc. 2014-13 adds new automatic accounting method changes to Rev. Proc. 2011-14 (which provides procedures for taxpayers to obtain automatic consent of the Commissioner to change a method of accounting).

Sales-based royalties

Rev. Proc. 2014-33 provides an automatic change in accounting method for a taxpayer that wants to change its method of accounting for sales-based royalties that are properly allocable to inventory property:


  • From not capitalizing sales-based royalties, to capitalizing these costs and allocating them entirely to cost of goods sold under a taxpayer’s method of accounting
  • From not capitalizing sales-based royalties, to capitalizing these costs and allocating them to inventory property under a taxpayer’s method of accounting
  • From capitalizing sales-based royalties and allocating these costs to inventory property to allocating them entirely to cost of goods sold, or
  • From capitalizing sales-based royalties and allocating these costs entirely to cost of goods sold to allocating them to inventory property

A taxpayer is not permitted to make a change in method of accounting under this section if the taxpayer wants to change to capitalizing sales-based royalties and allocating them to inventory property using an other reasonable allocation method within the meaning of Reg. section 1.263A-1(f)(4). In general, changes involving a reasonable allocation method for inventory are made under the advance consent procedure, Rev. Proc. 97-27.


There are also special requirements for taxpayers using a simplified method to determine the additional section 263A costs allocable to inventory property on hand at year-end and that are seeking to allocate sales-based royalties entirely to cost of goods sold. Such taxpayers must remove sales-based royalties allocated to cost of goods sold from the formulas used to allocate additional section 263A costs to ending inventory in the same manner that the taxpayer included these amounts in the formulas.


Finally, taxpayers using a simplified method with an historic absorption ratio election are required to make certain revisions to the historic absorption ratios.

Sales-based vendor chargebacks

Rev. Proc. 2014-33 provides an automatic method change for a taxpayer that wants to change its method of accounting to no longer include cost adjustments for sales-based vendor chargebacks in the formulas used to allocate additional section 263A costs to ending inventory under a simplified method.


Like the changes applicable to sales-based royalties, taxpayers that use a simplified method for additional section 263A costs must remove sales-based vendor chargebacks from the formulas used to allocate additional section 263A costs to ending inventory in the same manner that the taxpayer included these amounts in the formulas.


Likewise, taxpayers using a simplified method with an historic absorption ratio election are required to make certain revisions to the historic absorption ratio.


Rev. Proc. 2014-33 also provides an automatic change for a taxpayer that wants to change its method of accounting to treat sales-based chargebacks as a reduction in the cost of goods sold in accordance with Reg. sec. 1.471-3(e)(1).

Form 3115

Rev. Proc. 2014-33 waives certain of the scope limitations that generally apply to automatic accounting method changes (for example, such as being under IRS exam). The scope limitations are waived for a taxpayer’s first or second tax year ending on or after January 13, 2014.


The revenue procedure also permits taxpayers, in certain cases, to make a change described in the revenue procedure and other changes under section 263A for the same year of change on a single Form 3115.


The revenue procedure requires that a copy of a Form 3115 filed under this revenue procedure be filed with the IRS in Ogden, Utah, in lieu of filing the national office copy no earlier than the first day of the year of change and no later than the date the taxpayer files the original Form 3115 with its federal income tax return for the year of change. This also includes circumstances when a taxpayer makes a change under this revenue procedure and other changes under section 263A on a single Form 3115.




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