Tax Reform for Manufacturers: UNICAP Exemption Changes
More manufacturers may be exempt from the Uniform Capitalization (UNICAP) rules following tax reform. The UNICAP rules from Code Section 263A generally require that certain direct and indirect costs associated with real or tangible personal property manufactured by a business be included in inventory or capitalized.
Before the Tax Cuts and Jobs Act was passed in December 2017, the previous law allowed for businesses with average annual gross receipts of $10 million or less in the preceding three tax years to be exempt from UNICAP requirements as it relates to personal property acquired for resale. Note that this exemption does not extend to real property, such as buildings, or personal property that is manufactured or produced by a business.
Two key changes were passed under the new tax law effective after December 31, 2017. The first key change increased the annual gross receipts test from $10 million to $25 million. This test looks at the average annual gross receipts of the preceding three tax years. The second key change now allows for any producer or re-seller that meets the revised $25 million gross receipts test to be exempt from applying the Code Section 263A UNICAP rules. Previously, the exemption did not apply to any manufacturer or producer of real or personal property. Both revisions are favorable changes as they expand the number of entities that qualify for the exception to UNICAP application. The exemptions from these rules that are not based on a taxpayer’s gross receipts have been retained.
Impact on Manufacturers
If you have been required to apply the UNICAP provisions in prior years but now fall under the exemption, you can apply for a change in your method of accounting. You must use Form 3115 to file this change in accounting method with the IRS. In order to prevent amounts from being omitted or duplicated due to this change, an adjustment to taxable income may need to be taken into account.