Tax Cuts and Jobs Act of 2017 Provides Relief from UNICAP
By Jeremy S. Bass, CPA, Partner
There are various provisions of the Tax Cuts and Jobs Act of 2017 that are intended to simplify the tax code and provide tax and regulatory relief for businesses and thereby create jobs and stimulate economic growth. The UNICAP provisions under Code Section 263A(i) appear to simplify the tax code and provide tax and regulatory relief for small businesses who produce real or tangible property for sale to their customers or acquire property for resale. These provisions expand the exception to UNICAP for these small businesses, including manufacturers, for tax years beginning after December 31, 2017 who have average gross receipts for the past three years of $25 million or less. The prior law only applied to resellers and the average gross receipts for the past three years was $10 million or less. This new provision expands this exception to most small manufacturers and to more small retailers.
Under UNICAP, producers of real and tangible property were required to capitalize certain indirect costs and include them with the cost of the property produced for resale. Direct costs such as materials and labor were already included in inventory, but Code Section 263A required that the taxpayer must also consider certain indirect costs such as utilities, rental of facilities and equipment, indirect labor, depreciation and amortization, administrative costs, insurance and various other costs and capitalize these costs with its inventory. These costs would be inventory on the books of the taxpayer and deducted as a part of cost of goods sold when the item produced or held for resale was actually sold rather than expensed in the period incurred. This placed a burden on small businesses who had to either hire accounting staff or get assistance from outside accountants to calculate and account for these indirect costs in inventory and relieve these costs from inventory when items were sold. Depending on the complexity of accounting for the cost of the product produced and the type and amount of indirect costs incurred by the taxpayer, this could be a time consuming and expensive undertaking to make this calculation and comply with the requirements under Code Section 263A.
This may be a welcome change in the law to many small businesses who will no longer have the requirement to make this calculation each year. They will receive tax simplification and regulatory relief by not having to devote time and resources to make this calculation to be in compliance with Code Section 263A. They will receive tax relief in that indirect costs that are currently being required to be capitalized as inventory will be deductible in the year incurred. For tax years beginning after December 31, 2017, this will mean that any Code Section 263A costs currently in ending inventory will be able to be deducted in that tax year.
Taxpayers will need to file Form 3115 and request a change in accounting method to change from capitalizing costs under Code Section 263A to not capitalizing costs under Code Section 263A, and the resulting Code Section 481 adjustment will be deductible on that year’s tax return. Taxpayers who produce or resale real or tangible property and who have average annual gross receipts for the prior three years of under $25 million should consider making this accounting method change for the 2018 tax year and take advantage of the tax simplification and tax savings afforded to them by the Tax Cuts and Jobs Act of 2017. Please discuss your options with your tax advisers to help you make a decision on how to handle these costs and possible change in accounting method as it relates to Code Section 263A costs.
Jeremy S. Bass Tax Partner, CPA
Jeremy is a partner in our firm and has worked for over 29 years in public accounting, providing tax, accounting and consulting services. Education Campbell University, Bachelor of Business Administration – Accounting (Summa Cum Laude) Professional and Civic Memberships American Institute of Certified Public Accountants (AICPA) North Carolina Association of Certified Public Accountants (NCACPA) […]