The IRS on September 4 issued proposed regulations under section 263A addressing whether "negative additional section 263A costs" (negative amounts) are allowable in applying the simplified methods provided by the existing section 263A regulations. Section 263A requires taxpayers to capitalize all direct costs and indirect costs that directly benefit, or are incurred by reason of, the performance of production or resale activities.
In particular, the proposed regulations bar the use of negative amounts for large taxpayers unless the taxpayer uses the simplified resale method (SRM) or the proposed modified simplified production method (MSPM).
As a result, if the regulations are finalized as proposed, virtually all large producers would be required to change their section 263A method either to use the MSPM or to remove negative amounts from their section 263A calculations. Both options could increase significantly the complexity of section 263A.
The new regulations are proposed to apply to tax years ending on or after the date they are published as final regulations in the Federal Register. Notice 2007-29 (discussed below) would be superseded as of that date.