UNICAP taxpayers that claim bonus depreciation may benefit by using a historic absorption ratio

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August 2018

Overview

Taxpayers using the simplified production method or simplified resale method to allocate costs to ending inventory under the uniform capitalization (UNICAP) rules may use an annually-calculated absorption ratio or a historic absorption ratio (HAR). For many taxpayers, the HAR has more disadvantages than advantages. However, under some circumstances, taxpayers may be able to exclude bonus depreciation from the costs capitalized to ending inventory by electing the HAR.

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The takeaway

Certain taxpayers using the simplified production method or simplified resale method and planning to place in service property entitled to bonus depreciation may be able to reduce the amount of costs capitalized to ending inventory by electing the HAR.  Under the right circumstances, the advantages of using a HAR may outweigh the disadvantages.

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Christine Turgeon

Partner, Federal Tax Services Leader, PwC US

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