Wednesday, January 16, 2013

Uniform Capitalization UNICAP § 263A

 What are the Uniform Capitalization UNICAP § 263A Rules?

The UNICAP rules deny taxpayers immediate deduction for costs of producing property that taxpayer will use in its business or sell as inventory.  Costs that must be capitalized (or added to the cost of inventory) include depreciation on equipment used in producing the property, employee’s wages allocable to production of the property, and an appropriate share of the rent and utilities expenses of the facility where property is produced. § 263A is for tangibles. This better matches expenses other related income and avoid un-wanted deferral of taxes by IRS.

If § 263A applies to property, they the must apply direct and indirect costs allocated to the property. A taxpayer cannot capitalize a cost if it would not be otherwise deductible. Same limitations in other deduction rules apply, for example the entertainment 50% limitation.

Direct v. Indirect Costs under UNICAP rules and Section 263A

Direct Costs = Materials and labor directly attributable to some specific property produced are CAPITALIZED.

Indirect Costs = ALWAYS HAVE TO CAPITALIZE. Includes rent, utilities, insurance, an indirect labor costs, compensation that can’t be attributed, quality control and inspection, certain taxes on production facilities, costs of soliciting contracts to make property, hazardous waste costs, and storage costs.

Costs that are never capitalized – Selling and distribution expenses, overall management costs, research and development, deductible losses (§ 165), income taxes, product liability insurance, and strike costs. Even if they are arguable attributable to creating or buying some piece of tangible property.

Mixed- Service Costs – They are indirect business admin costs. Much in the same way that the regulations dictate that they must allocate indirect costs. They say that mixed service costs, some of them to pieces of property and deduct others. Statutory Formula.

How much do these costs directly benefit the making or buying of tangible property and how much do they not? Then split up. Split between deductibility.  Personnel, Payroll departments, Security Departments.

Qualified Creative Exceptions. § 263A(h) – includes a personal efforts requirement, but does not mean that the taxpayer has to physically create the art in question. THINK ARTISTS.  If they are doing something, it probably qualifiedunder 263A(h)- Not performing detailed design work, then does not qualify because he not exerting effort.

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