In a quick summary, UNICAP is short for the Uniform Capitalization rules found in Internal Revenue Code § 263A. It requires taxpayers to capitalize, rather than expense, a portion of indirect costs associated with the production of inventory. Exemptions to UNICAP did exist pre-tax reform, however, now they cover many more businesses.
I must admit, this particular change in tax reform makes me happy. UNICAP can be a messy and dreaded part of tax preparation, especially considering that every preparer has a different calculation method. This is acceptable because the calculation requires a reasonable and consistent method – so come to a consensus on your calculation and stick to it!
My colleague, Brian Isom, and I have had many conversations on this terribly dry topic, sometimes at odds on how to read and interpret the regulations (while we both generally have good points, he usually wins). Luckily, tax reform has come to the rescue for ‘small’ taxpayers in this area. For tax years beginning after December 31, 2017, taxpayers who have annual gross receipts of $25 million or less during the preceding three years are generally exempt from UNICAP. As mentioned, the old rules had exemptions to UNICAP as well, such as the exemption for resellers with gross receipts less than $10 million, but very slim chance of escaping if you were a producer (i.e. manufacturer). The exemptions that applied under old laws unrelated to gross receipts are retained under the revised provisions.
So while larger businesses with inventories may still be subject to UNICAP, a nice break for the ‘small’ guys is now increased from $10 million to $25 million of gross receipts, and expanded to include manufacturers as well as resellers in that test. If you find yourself in the category of taxpayers that is now exempt from UNICAP, but previously not, it’s likely you’ll need to consider this an accounting method change and file appropriately. Your best bet is to wait for IRS regulations on specifically how to implement. I guess Brian and I will debate less often on this one now!
This article is not intended to provide specific tax advice and does not discuss all aspects of tax reform. Please consult your tax advisor or contact us to see how these rules may impact your unique situation.