UNICAP and Final Regulations for Section 263A

EPISODE 41: DHG's Eric Hessler and Justin Herp discuss recently issued final regulations for Section 263A, addressing UNICAP updates and the new modified simplified production method. 



[00:00:09] JL: Welcome to today's edition of DHG’s GrowthCast. I'm your host, John Locke. At DHG, our strength lies in our technical knowledge, our industry intelligence, and our future focus. We understand business needs and are laser-focused on company goals. In this ever-changing world, DHG's GrowthCast provides insights and thought-provoking conversations on topics and trends that address growth opportunities and challenges in the current and future marketplace. Thanks for joining us as we discuss tomorrow's needs today.

[00:00:42] ANNOUNCER: The views and concepts expressed by today's panelists are their own and not those of Dixon Hughes Goodman LLP. Always consult the advice of your legal and financial professional before taking any action.


[00:00:58] JL: Today, we are going to talk taxes and specifically the impact of the new UNICAP regulations known as Internal Revenue Code Section 263A on taxpayers. Joining me are Eric Hessler, a Senior Manager, and Justin Herp, a Senior Associate in DHG’s Tax Advisory practice. Welcome to you both.

[00:01:20] EH: Thank you, John.

[00:01:20] JH: Thank you very much, John.

[00:01:22] JL: So the IRS has issued final UNICAP regulations, and we're going to learn how these regulations are significantly impacting taxpayers. Why don't we start with a little background on UNICAP and why this is so important right now, Justin?

[00:01:38] JH: Thank you, John. These final UNICAP regulations you mentioned were issued in late 2018 and generally effective for tax years 2019 and after. These regulations introduce a broad range of modifications to how inventory costs are computed for tax purposes. This is really important right now specifically for taxpayers to review their current UNICAP methods and make sure they are in full compliance with these latest regulations.

[00:02:02] JL: So what are some of the specific revisions that were included in the final regulations that would be of significance to taxpayers? Can you give us some more details about those, Eric?

[00:02:12] EH: Sure. There are three main areas, John, that are in the key final regulations and they are – The first one is a change in how Section 471 costs are calculated. Additionally, there are changes on restrictions in using negative 263A adjustments. Finally, there's an introduction of a new method within UNICAP called the modified simplified production method.

[00:02:35] JL: So which taxpayers are most impacted by this and what does this all mean for them?

[00:02:42] EH: Well, first, I just want to remind listeners that any taxpayer producing or purchasing inventory now that's real or personal property for resale is likely subject to UNICAP, unless there are a small taxpayer, and that means less than $26 million inflation adjusted of average annual gross receipts.

[00:03:00] JH: We're mostly talking about manufacturers, any taxpayers who are previously using the simplified production method who will be the most affected. The new modified simplified production method that Eric mentioned presents an opportunity for these taxpayers to switch their method and get a potentially more favorable tax treatment on any raw materials and inventories required for resale, reducing the cost capitalized on these types of inventories.

[00:03:23] JL: So tell us more about the modified simplified production method. Why did the IRS introduce this method and how does it impact taxpayers?

[00:03:33] EH: Well, John, as Justin mentioned earlier, modified simplified production method allows manufacturers and manufacturer resellers to derive tax benefits from a more favorable tax treatment of their raw materials and resale inventories. So the new method provides that benefit but it can also provide relief from administrative burden associated with compliance with the simplified production method, and that is going to be subject to more stringent restrictions regarding the requirement to compute Section 471 costs on a tax basis. Also, as I had mentioned earlier, the restriction on using negative adjustments to 263A costs in the calculation.

[00:04:08] JL: So what action items should our audience take right now if they think they're impacted by these regulations?

[00:04:14] JH: The first crucial step here is to meet with your tax advisor to look at how you are currently computing UNICAP costs and whether there's an opportunity to change your method based on your current method and also if there's any risk to address when it comes to compliance. Remember, as we mentioned earlier, these regulations are effective for tax years 2019 and after, so the time to act is now.

[00:04:35] JL: So how can DHG help taxpayers in this area?

[00:04:39] EH: Well, John, our tax counting methods team has extensive experience with UNICAP accounting methods, and that's for taxpayers of all sizes from the local family-owned retailers to large multinational manufacturing businesses. We can help taxpayers identify and mitigate key risk areas. We can analyze current business operations and put together customized UNICAP calculations based on each taxpayer's individual facts and circumstances.

[00:05:03] JH: We also help prepare the Form 3115 to help formally adopt the new methods under UNICAP. So whether you're a taxpayer implementing your account for the first time or just revamping your method to keep up with the current regulations, our team is well-versed to help taxpayers accomplish the task.

[00:05:18] JL: Sounds great. So if our listeners want to find out some more information on this, where would they go?

[00:05:24] EH: You can always visit us at dhg.com or reach out to the team at tax@dhg.com.

[00:05:31] JL: Okay, great., Well, listen. Thank you, Eric, Justin for your time today. This was very helpful, and we appreciate you sharing your thoughts and expertise with our listeners.

[00:05:43] EH: Thank you, John.

[00:05:43] JH: Thank you, John.

[00:05:46] JL: And thank you, our listeners, for being with us today on DHG GrowthCast and our discussion on the new UNICAP regulation. We hope that you now have a better understanding of the impact of UNICAP on the average taxpayer. I'm your host, John Locke, and I look forward to reconnecting with you soon on another episode of DHG GrowthCast.

End of Interview
About DHG's GrowthCast

At DHG, our strength lies in our technical knowledge, our industry intelligence and our future focus. We understand business needs and are laser focused on company goals. In this ever-changing world, DHG’s Growthcast, provides insights and thought -provoking conversations on topics and trends that address growth opportunities and challenges in the current and future marketplace. Join us in discussing tomorrow’s needs today.

Disclaimer: The views and concepts expressed by today’s guests are their own and not those of Dixon Hughes Goodman LLP. Always consult with your legal and financial professional before taking any action.


Eric Hessler
Senior Manager, Tax-Federal Specialty

Justin Herp
Senior Associate, Tax-Core


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