IRS Publishes Final Uniform Capitalization Allocation Regs

IRS Publishes Final Uniform Capitalization Allocation Regs

Internal Revenue Service

The IRS has published final regulations (<a href="//s3.amazonaws.com/pdfs.taxnotes.com/2018/2018-45717_TNTIRSdocs_td9843.pdf">T.D. 9843</a>) on the use of negative amounts for calculating additional <a href="/research/federal/usc26/263A" resolve="/lr/resolve/263a/cq9j" title="263A">section 263A</a> costs. The final regs adopt, with changes, proposed regulations (<a href="/lr/resolve//1r2ry">REG-126770-06</a>) published in 2012. Two commentators stated that the prohibition under the proposed regs on including negative adjustments in additional section 263A costs for taxpayers above the gross receipts threshold using the simplified production method (SPM) was unfair to taxpayers unable or unwilling to use the modified SPM. The final regs include several changes to address those comments and reduce compliance costs, burden, and administrative complexity but retain, without change, the general restriction on the inclusion of negative adjustments in additional section 263A costs. To limit potential distortion in the simplified methods, the regs also provide a new consistency requirement for taxpayers that can include negative adjustments in additional section 263A costs to remove <a href="/research/federal/usc26/471" resolve="/lr/resolve/471/cqrp" title="471">section 471</a> costs and that include negative adjustments to remove section 471 costs. The rule requires those taxpayers to use that accounting method for all section 471 costs that can be removed using negative adjustments. The regs also clarify that specified business expenses can’t be removed from a taxpayer’s section 471 costs as negative adjustments in additional section 263A costs. The final regs clarify the classification of costs and revise the modified SPM so that taxpayers are not required to separately track direct material costs that are integrated into work-in-process and finished-goods inventories. In response to comments, the regs expand the types of methods allowed under the modified SPM to allocate mixed-service costs between preproduction and production additional section 263A costs. The regs also include a de minimis rule allowing some taxpayers to allocate 100 percent of capitalizable mixed-service costs to preproduction or production additional section 263A costs. The final regs provide that additional section 263A costs properly allocable to property produced under a contract and property acquired for resale are generally included in preproduction additional section 263A costs under the modified SPM. Section 471 costs are treated similarly under the regs, which clarify direct material costs that are included in preproduction section 471 costs. The final regs include clarifications for last-in, first-out method taxpayers using the modified SPM and on the types and amounts of section 471 costs. The regs generally retain the requirement that section 471 costs include all direct costs of property produced and property acquired for resale but provide an alternative method that some taxpayers may use to determine the amounts of their section 471 costs and de minimis rules to exclude some direct labor and material costs from section 471 costs (and include in additional section 263A costs). The regs also provide a safe harbor rule allowing some taxpayers to exclude specified variances and under or overapplied burdens from section 471 costs (and include in additional section 263A costs). The final regs allow taxpayers with average annual gross receipts of $50 million (up from $10 million in the proposed regs) or less for the three prior tax years to include negative adjustments in additional section 263A costs under the SPM. <a href="/lr/resolve//28m5n">Rev. Proc. 2018-56</a> has been simultaneously released to provide the procedures by which a taxpayer may obtain automatic consent to make some method changes to conform to the final regs. The final regs are generally effective November 20, 2018. For any tax year that begins before and ends after November 20, 2018, the IRS will not challenge return positions consistent with the final regs.

The IRS has published final regulations (T.D. 9843) on the use of negative amounts for calculating additional section 263A costs.

The IRS has published final regulations (T.D. 9843) on the use of negative amounts for calculating additional section 263A costs. The final regs adopt, with changes, proposed regulations (REG-126770-06) published in 2012. Two commentators stated that the prohibition under the proposed regs on including negative adjustments in additional section 263A costs for taxpayers above the gross receipts threshold using the simplified production method (SPM) was unfair to taxpayers unable or unwilling to use the modified SPM. The final regs include several changes to address those comments and reduce compliance costs, burden, and administrative complexity but retain, without change, the general restriction on the inclusion of negative adjustments in additional section 263A costs. To limit potential distortion in the simplified methods, the regs also provide a new consistency requirement for taxpayers that can include negative adjustments in additional section 263A costs to remove section 471 costs and that include negative adjustments to remove section 471 costs. The rule requires those taxpayers to use that accounting method for all section 471 costs that can be removed using negative adjustments. The regs also clarify that specified business expenses can’t be removed from a taxpayer’s section 471 costs as negative adjustments in additional section 263A costs. The final regs clarify the classification of costs and revise the modified SPM so that taxpayers are not required to separately track direct material costs that are integrated into work-in-process and finished-goods inventories. In response to comments, the regs expand the types of methods allowed under the modified SPM to allocate mixed-service costs between preproduction and production additional section 263A costs. The regs also include a de minimis rule allowing some taxpayers to allocate 100 percent of capitalizable mixed-service costs to preproduction or production additional section 263A costs. The final regs provide that additional section 263A costs properly allocable to property produced under a contract and property acquired for resale are generally included in preproduction additional section 263A costs under the modified SPM. Section 471 costs are treated similarly under the regs, which clarify direct material costs that are included in preproduction section 471 costs. The final regs include clarifications for last-in, first-out method taxpayers using the modified SPM and on the types and amounts of section 471 costs. The regs generally retain the requirement that section 471 costs include all direct costs of property produced and property acquired for resale but provide an alternative method that some taxpayers may use to determine the amounts of their section 471 costs and de minimis rules to exclude some direct labor and material costs from section 471 costs (and include in additional section 263A costs). The regs also provide a safe harbor rule allowing some taxpayers to exclude specified variances and under or overapplied burdens from section 471 costs (and include in additional section 263A costs). The final regs allow taxpayers with average annual gross receipts of $50 million (up from $10 million in the proposed regs) or less for the three prior tax years to include negative adjustments in additional section 263A costs under the SPM. Rev. Proc. 2018-56 has been simultaneously released to provide the procedures by which a taxpayer may obtain automatic consent to make some method changes to conform to the final regs. The final regs are generally effective November 20, 2018. For any tax year that begins before and ends after November 20, 2018, the IRS will not challenge return positions consistent with the final regs.

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IRS Publishes Final Uniform Capitalization Allocation Regs