More than a few businesses may be subjected to what the IRS calls "uniform capitalization rules."
In the language of the IRS, these rules are referred to as UNICAP or Section 263A. They focus on direct and indirect costs regarding personal property produced or acquired by a business.
If property is acquired for resale, for example, the direct and some indirect costs of the acquisition can be capitalized for tax purposes under these rules.
Before getting into the weeds of UNICAP, you can breathe easily if you meet a few exceptions to the rule. UNICAP has no impact on you if you are a reseller and your business has not exceeded $10 million in gross sales receipts over the past three years.
Some users of the cash method of accounting you are not subject to the 263A rule, either. However, if you meet the criteria and face UNICAP, you have to look at capitalizing some of the following costs:
- Direct costs. These include the cost of materials and labor during production, contractors and benefits, and property acquired for resale.
- Indirect costs. These are costs that benefit acquisition and production activities but are ancillary. They include employee benefit expenses and charges for materials, handling, purchasing, storage, taxes, rent, utilities, engineering, equipment, design and more.
- Service costs. These are administrative and general expenses related to production or acquisition.
Capitalizing expenses means recording them as an asset rather than an expense. The charges will appear on the balance sheet and not the income statement. The eventual deduction of the expenses typically comes through depreciation of equipment and cost of goods sold.
UNICAP is the kind of complex accounting best left to your accounting partner. Before making expenditures it is wise to anticipate the financial implications and the impact on any UNICAP charges.
The best advice is to listen to the tax experts and determine how UNICAP, if it will be a factor, will influence your tax liability.
Meta: Understanding how UNICAP works and when the IRS requires it is important when managing your year-end accounting.
File Download: Understanding UNICAP’s Impact On Your Taxes