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Inventory regs increase burden on middle market

New rules increase burden, complexity on many middle market businesses

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Inventory regs increase burden on middle market This Tax Insights article details the IRS final regulations under the uniform capitalization rules of Section 263A. These regulations will likely result in significant additional burden and complexity on many businesses, particularly manufacturers that do not capitalize all direct costs for financial statement purposes, taxpayers using the simplified production method, and taxpayers without audited financial statements.

Some of the key changes in the new regulations include:

  • Special rules and definitional items that:
  • Will require many taxpayers to make burdensome tax adjustments to their financial statement method prior to applying one of the simplified capitalization methods
  • Prohibit taxpayers without audited financial statements from including all adjustments to capitalized costs necessary to comply with Section 263A in the numerator of the simplified methods (only certain costs are allowed)
  • A general prohibition against the use of “negative adjustments” in conjunction with the simplified production method for taxpayers with gross receipts over $50 million
  • A modified simplified production method (MSPM) of accounting for allocating additional Section 263A costs to inventory or other property on hand at year-end

The regulations impact taxpayers regardless of whether the taxpayers are currently using a simplified method and are effective for tax years beginning after Nov. 20, 2018. While the new rules are required to be used for tax years beginning after that date, taxpayers may choose to apply these regulations to their first return ending on or after that date.