The IRS has released a Chief Counsel advice memorandum (CCA 202114019
) holding that a qualifying small business taxpayer with inventory purchased for resale is only allowed to capitalize the acquisition cost of the inventory.
The taxpayer that requested the advice was a reseller of merchandise and did not perform any production activities. Although the taxpayer met the gross receipts test to qualify as a small business taxpayer under Section 448(c), the taxpayer did not account for its inventories under one of the small business methods prescribed in Section 471(c). However, as a qualifying small business, the taxpayer elected to avoid applying the uniform capitalization rules under Section 263A.
The taxpayer incurred standard costs to acquire its merchandise (i.e., the purchase price plus transportation and other costs necessary to acquire possession of the goods) that small business taxpayers generally capitalize into the cost of inventory for book purposes. Additionally, the taxpayer incurred various other costs such as purchasing and storage and handling costs that many small business taxpayers do not capitalize into inventory for book purposes.
The CCA refers to the definition of “cost” provided in Treas. Reg. Sec. 1.471-3(b), which generally includes the invoice price of the resale goods less trade or other discounts and the transportation or other necessary charges incurred in acquiring possession of the goods. Since the taxpayer elected not to apply the uniform capitalization rules, the IRS determined that it was neither permitted nor required to capitalize additional costs to its inventory because those costs are not described in Section 471.
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