1. UNIFORM CAPITALIZATION RULES FOR INVENTORY
263A TRAINING
UNIFORM CAPITALIZATION RULES FOR INVENTORY

2. Background
The Uniform Capitalization Rules (“UCR”) related to resellers require that certain additional costs associated with property acquired for resale be treated as inventoriable costs
The UCR related to producers/manufacturers require capitalization of indirect costs which are properly allocable to property that is produced
Exception for small resellers (average annual gross receipts not exceeding $10 million for preceeding 3 years)

3. 263A CALCULATION
UNICAP creates an M-1 that is a temporary book/tax difference
MLR has a UNICAP template for resellers and for producers in K: Engagement Templates/ Workpaper Templates/Tax Workpapers
If client already has a calculation they have been using, we generally stay with that method
Client may fill out some of the data in the 263A calculation worksheet or we may complete it based on client information

4. UNICAP – Reseller
“SR Method – Reseller” tab is the better calculation, but for some clients were are using the oversimplified version on the “UNICAP – Reseller” method , or a similar calculation method
We determine the capitalizable costs based on the ratio of purchasing salaries to total salaries; in our example template, there is a separate bucket of capitalizable purchasing costs and capitalizable storage & handling costs
An absorption ratio is calculated for each – based on capitalizable costs over book costs for purchases or beginning inventory
Combined absorption ratio is then applied to the ending inventory balance to determine the UNICAP adjustment to ending inventory
The M-1 for current year taxable income is the difference between the current year and prior year UNICAP adjustment amounts
Most of the inputs will come from the client, from the TB, from the P&L statement in the AFS, or a combination – preparers should look to prior year and/or RP guidance

5. EXAMPLE – FOUR HANDS
On the method using the “oversimplified” version of the reseller calculation with just a single absorption ratio (different formula but same result)
Workpaper includes a tie-out of book COGS and tax COGS for Schedule 1125-A (and a check figure for tax COGS)
Form 8916-A Part I – COGS for M-3 filer
Additional 263A costs on line 2n as a permanent difference
UNICAP Adjustment to ending inventory on line 6 as a temporary difference (in this case the adjustment is shown against beginning and ending inventory, which I believe is more correct, but you may also see the adjustment against the purchases instead)

6. UNICAP – Production
Same concept, but allocation of G&A costs based on ratio of production labor costs to total labor costs
Inputs will come from TB, info from client, AFS, or likely a combination – look to PY and guidance from RP
Presentation on tax return forms 1125-A and A is the same

7. QUESTIONS?