Calculating Section 263A Capitalized Inventory Costs

Section 471 provides the requirement to maintain inventory. Specifically, taxpayers must account for inventory at the beginning and end of each taxable year in which the production, purchase or sale of merchandise is an income-producing factor in the taxpayer’s trade or business. Section 263A provides uniform capitalization (UNICAP) rules for certain direct and indirect costs of property produced by a taxpayer or acquired for resale.

IRC Section 263A requires taxpayers with inventory to capitalize certain direct and indirect expenses to the items produced beyond what is required for Section 471. Direct labor and material costs, indirect costs such as purchasing and handling, and mixed service costs must be allocated using UNICAP. Mixed service costs could include certain G&A costs as well as accounting and depreciation expenses.

Prior to TCJA, there were two simplified UNICAP methodologies, the simplified resale method and the simplified production method. During 2018, final regulations were issued that provided for another simplified method, the modified simplified production method, that provides many advantages to producers.

TCJA included legislation that provided certain exceptions to for the capitalization of costs under Section 263A for small business taxpayers including the requirement to capitalize interest expense to certain property produced by taxpayers. Tax practitioners working with businesses producing inventory must understand the latest guidelines and how to comply expeditiously.

1. Identify accepted allocation methods
2. Determine costs included in mixed service costs
3. Decide what exceptions to UNICAP are available to producers under 263A
4. Ascertain suggestions to facilitate 263A calculations

The panel will discuss these and other critical issues:

• When Inventory is Required
• Section 263A and Simplified Methodologies
• Who is Not Subject to 263A
• Suggestions to Facilitate 263A calculations

Learning Objectives

After completing this course, you will be able to:

• Identify accepted allocation methods
• Determine costs included in mixed service costs
• Decide what exceptions to UNICAP are available to producers under 263A
• Ascertain suggestions to facilitate 263A calculations

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of corporate taxation, including taxation of businesses and shareholders, net operating losses and loss limitations; familiarity with net operating loss carry-backs and carry-forwards.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).