UNICAP rules on negative adjustments finalized

By Alistair Nevius, J.D.

The IRS on Monday issued final regulations (T.D. 9843) that amend the uniform capitalization (UNICAP) rules under Sec. 263A. The IRS also updated the procedures by which taxpayers can get automatic consent to change their methods of accounting to reflect the new regulations (Rev. Proc. 2018-56).

UNICAP regulations

The IRS says the rules issued in T.D. 9843 are intended to reduce various “compliance costs, burden, and administrative complexity” under Sec. 263A. The regulations provide rules for the treatment of negative adjustments related to certain costs required to be capitalized to property produced or acquired for resale. They also provide a new simplified method of accounting — called the modified simplified production method — for determining the additional Sec. 263A costs that must be capitalized to ending inventory or other property on hand at the end of the year.

Finally, the regulations redefine how certain types of costs are categorized for purposes of the simplified methods for determining the additional Sec. 263A costs that must be capitalized to ending inventory or other property on hand at the end of the year. The final regulations adopt, with revisions, proposed regulations issued in 2012 (REG-126770-06).

Sec. 263A requires taxpayers to capitalize direct and indirect costs that are properly allocable to real or tangible property produced by the taxpayer and real or personal property described in Sec. 1221(a)(1) acquired for resale by the taxpayer. These costs must generally be allocated to specific inventory items. Two simplified methods available under Regs. Secs. 1.263A-2(b) and 1.263A-3(d) (the simplified production method and simplified resale method, respectively) provide exceptions to this rule because they allocate a pool of capitalizable costs between ending inventory and cost of goods sold using a ratio rather than allocating them to specific inventory items.

However, the simplified methods can result in the inclusion of negative amounts in some circumstances, which can produce significant distortions in the amount of additional costs allocated to inventory. The final regulations prohibit the inclusion of negative adjustments under the simplified methods. There is a safe harbor for producers with average annual gross receipts of $50 million or less for the three previous tax years, who are permitted to include negative amounts under the simplified production method. (The safe harbor is increased from $10 million in the proposed regulations.) Taxpayers that are permitted to include negative adjustments are subject to a new consistency requirement in their treatment of Sec. 263A costs and Sec. 471 costs.

The final regulations are effective with their publication in the Federal Register (scheduled for Nov. 20, 2018).

Accounting method changes

Under Sec. 446(e) and Regs. Sec. 1.446-1(e)(2), taxpayers must obtain consent from the IRS before changing a method of accounting for federal tax purposes. Rev. Proc. 2015-13, as clarified and modified by Rev. Procs. 2015-33, 2016-1, and 2017-59, provides the general procedures for obtaining automatic consent to change a method of accounting.

Rev. Proc. 2018-56 covers how resellers or reseller-producers can obtain automatic consent to change to a UNICAP method of accounting described in the final regulations.

Alistair M. Nevius, J.D., (Alistair.Nevius@aicpa-cima.com) is the JofA’s editor-in-chief, tax.

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