Page 127 - TaxAdviser_2022

TAX CLINIC

to the extent allocable to resale or the simplified resale method or a for tax purposes and may benefit from
production activities in accordance with burden-rate method under Regs. a proper analysis of applicable costs.
Regs. Sec. 1.263A-1(e)(4). As defined Sec. 1.263A-1(f)(3)(i). Interestingly, Lastly, resellers should be aware
in Regs. Sec. 1.263A-1(e)(4)(ii)(C), the practice unit references TAM of certain exceptions to Sec. 263A
mixed-service costs are service costs 200437035, in which a taxpayer’s in Regs. Sec. 1.263A-1(b). Common
that are partially allocable to capitaliz- burden-rate method did not clearly exceptions highlighted in the LB&I
able functions and partially allocable reflect income because it used direct practice unit on resellers include the
to deductible functions. The practice labor as a base for developing standard exception for small resellers (which
unit refers to TAM 200446024 to costs to allocate storage and handling is generally effective for tax years be-
highlight that purchasing and storage costs. Resellers that wish to use a ginning on or before Dec. 31, 2017),
and handling costs are not eligible to be burden-rate method may instead con- the exception for property provided
included in mixed-service costs, as they sider developing burden rates based incident to services, and the exception
are not service costs but direct costs on unit information, as this approach for small business taxpayers (which
of resellers. generally meets the same degree-of- is generally effective for tax years
A more favorable reading of the specificity requirements outlined in beginning after Dec. 31, 2017). Such
TAM suggests this guidance can be TAM 9821001 and TAM 9717002. exceptions may allow resellers to avoid
beneficial for resellers with merchan- Resellers wishing to avoid such ad- performing a Sec. 263A computation.
dising and other departments that ministrative burdens may nevertheless However, resellers should be aware
perform discrete functions. Merchan- find the available simplified methods that a change in method of accounting
dising departments for resellers often such as the simplified resale method to may be required to properly implement
include several distinct functions that be cost-beneficial approaches to valu- such exceptions.
can be analyzed separately from one ing inventories. For calendar-year taxpayers, the
another. For example, a merchandising An additional area of consider- three-year period granted to comply
department may include: (1) buyers ation for resellers that is referenced with the final Sec. 263A regulations
that are responsible for the capitaliz- in the practice unit — but is often closed with the tax year ended Dec. 31,
able purchasing function; (2) personnel overlooked by resellers — is self- 2020. The release of the LB&I practice
responsible for visual display and other constructed assets. As discussed unit providing guidance to examin-
deductible marketing and selling func- in more detail in two other LB&I ing agents when reviewing Sec. 263A
tions; and (3) mixed-service functions practice units, Interest Capitalization computations for resellers could signify
such as administration of the entire for Self-Constructed Assets and Section that Sec. 263A computations will soon
merchandising department. 263A Costs for Self-Constructed Assets, become an area of focus for the IRS
Similarly, a reseller’s warehousing both released earlier, Sec. 263A and during exam. Nonetheless, the guid-
department often includes nonhandling the regulations thereunder are gener- ance provided in the LB&I practice
functions such as human resources, ally applicable to self-constructed real unit can be observed by taxpayers as
logistics management, and other ad- property. For example, many resellers an outline of key aspects to a reseller’s
ministrative support functions. Analyz- incur costs to construct real property Sec. 263A computation that may be
ing departments at the functional level (e.g., retail stores), including costs as- scrutinized upon IRS exam.
is likely to generate a more favorable sociated with leasehold improvements From John Suttora, CPA; Thomas
result for the taxpayer. Additionally, on real property. Resellers should Stockdale, CPA; and Dennis St.
this approach is consistent with the understand the extent to which such Martin, CPA, Washington, D.C.,
general audit techniques described activities related to self-constructed as- Grant Thornton LLP. Not affiliated
in the practice unit, which suggests sets are performed and which costs (if with Deloitte Tax LLP. ■
examining agents review functions of a any) are capitalized for financial state-
taxpayer’s departments. ment purposes. Further, Sec. 263A(f)
provides rules for capitalizing interest Editor
Capitalization of Sec. 263A to self-constructed assets, and resellers
costs to ending inventory and must also evaluate the extent to which Alexander J. Brosseau, CPA, is a senior
other considerations such rules apply. Often, resellers with manager in the Tax Policy Group of
A reseller may use any of several activities related to self-constructed as- Deloitte Tax LLP’s Washington National
methods to allocate Sec. 263A costs sets capitalize more costs for financial Tax office.
to ending inventory. These include statement purposes than are required

18 March 2022 The Tax Adviser