Mixed Service Inventory Costs Used in UNICAP
We recently detailed some of the basics of the uniform capitalization rules (UNICAP) under IRC Sec. 263A. This code section requires that certain costs normally expensed be capitalized into inventory. One of the cost components that must be considered are mixed service costs. All companies have departments that perform administrative, service or support activities that are necessary for the overall operation of the company. These departments are not directly involved in the manufacturing process, but they do benefit and support the manufacturing department operations and therefore are subject to UNICAP. Some examples of these mixed service departments:
- Human Resources
- Legal Services
- Warehouse and Storage
Each year when determining the 263A adjustment for tax purposes, an allocation of these mixed service costs must be included. So how do you determine how much of these costs to allocate? A taxpayer could develop their own reasonable allocation method based on factors or relationships that reasonably relate the mixed service department costs to the benefits received. Measures based on the total output of each department (i.e. number of hours provided to a department as a fraction of the total number of service hours provided to all departments) are acceptable.
The IRS has also approved a simplified service cost method of allocating these expenses. With this method, the production mixed service costs equal:
Total production costs for the year (excluding mixed service costs and interest) Total Mixed
Total business costs (excluding mixed service costs, interest and income taxes) X Service Costs
The result is included with your additional 263A costs when you complete your UNICAP calculations.
Mixed service costs are an important component and should not be overlooked when analyzing total inventory costs to capitalize. These costs and the allocation should be reviewed annually when you complete your UNICAP calculations. If you have any questions on mixed service inventory costs contact an Anders advisor.