The IRS and Treasury recently published final regulations on the treatment of ‘negative additional Section 263A’ costs that arise when a taxpayer uses a simplified method to allocate costs to ending inventory (EI). Under Section 263A, also known as uniform capitalization (UNICAP), taxpayers required to maintain inventories must capitalize (i.e., treat as inventory costs) all direct costs and certain indirect costs allocable to production or resale activities.
The final regulations generally apply for tax years beginning on or after November 20, 2018. Thus, calendar-year taxpayers must comply with the regulations beginning in 2019. For tax years that both begin before and end after November 20, 2018 (for example, calendar year 2018), the preamble states that the IRS will not challenge tax positions consistent with the final regulations. The final regulations can be accessed here.
The IRS also released Rev. Proc. 2018-56, which provides automatic consent and procedures for taxpayers to change their methods of accounting consistent with the final regulations. The revenue procedure can be accessed here.
This Insight discusses in detail the rules in the final regulations relating to the new modified simplified production method (MSPM), and the rules in the final regulations and Rev. Proc. 2018-56 relating to methods of accounting and method changes. For a discussion of rules in the final regulations on the definition of Section 471 costs for purposes of Section 263A and the use of negative adjustments to additional Section 263A costs, see Final regulations provide complex rules on negative additional Section 263A costs. PwC professionals discussed the final regulations in a webcast on December 18, 2018, which can be viewed here.
Most large taxpayers using the SPM will want to change to the new MSPM under the final regulations. The MSPM is much more complex than the SPM, but not nearly as complex as making negative adjustments to Section 471 costs, which would be required for large taxpayers that continue to use the SPM.
All taxpayers should evaluate whether to file additional accounting method changes to implement methods permitted or required under the final regulations, including changes to the alternative (AFS) method for determining Section 471 costs, the de minimis rules for direct costs, the safe harbor for variances and over/under-applied burden, the methods for allocating capitalizable MSC under the MSPM, and to revoke the HAR election.