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Calculating Section 263A Capitalized Inventory Costs

Allocation Methods; Direct, Indirect, and Mixed Service Costs; Calculating Absorption Ratios; Recent Legislation

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Monday, January 27, 2025

Recorded event now available

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This webinar will explore the latest rules surrounding IRC Section 263A capitalization and inclusion requirements for certain expenses in inventory. Our panel of inventory accounting method experts will define UNICAP costs and compare allocation methods for assigning these costs using examples and frequently encountered scenarios.

Description

Section 471 provides the requirement to maintain inventory. Specifically, taxpayers must account for inventory at the beginning and end of each taxable year in which the production, purchase or sale of merchandise is an income-producing factor in the taxpayer’s trade or business. Section 263A provides uniform capitalization (UNICAP) rules for certain direct and indirect costs of property produced by a taxpayer or acquired for resale.

IRC Section 263A requires taxpayers with inventory to capitalize certain direct and indirect expenses to the items produced beyond what is required for Section 471. Direct labor and material costs, indirect costs such as purchasing and handling, and mixed service costs must be allocated using UNICAP. Mixed service costs could include certain G&A costs as well as accounting and depreciation expenses.

Prior to TCJA, there were two simplified UNICAP methodologies, the simplified resale method and the simplified production method. During 2018, final regulations were issued that provided for another simplified method, the modified simplified production method, that provides many advantages to producers.

TCJA included legislation that provided certain exceptions to for the capitalization of costs under Section 263A for small business taxpayers including the requirement to capitalize interest expense to certain property produced by taxpayers. Tax practitioners working with businesses producing inventory must understand the latest guidelines and how to comply expeditiously.

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Outline

  1. Identify accepted allocation methods
  2. Determine costs included in mixed service costs
  3. Decide what exceptions to UNICAP are available to producers under 263A
  4. Ascertain suggestions to facilitate 263A calculations

Benefits

The panel will discuss these and other critical issues:

  • When Inventory is Required
  • Section 263A and Simplified Methodologies
  • Who is Not Subject to 263A
  • Suggestions to Facilitate 263A calculations

Faculty

Houser, Cindy
Cindy Houser

Principal
CliftonLarsonAllen

Ms. Houser is Principal at CliftonLarsonAllen (CLA). 

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Parra, Erica
Erica Parra

Manager
CliftonLarsonAllen

Ms. Parra is a Manager at CliftonLarsonAllen (CLA).

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Strong, David
David Strong, CPA

Partner
Crowe

Mr. Strong is a leader in the delivery of tax accounting services related to inventory valuation, accounting method...  |  Read More

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