How to Calculate 263A

Save

Internal Revenue Service Code Section 263A describes how businesses must apply certain direct and indirect costs to the value of inventory rather than simply deducting them as current-year expenses. The process, "uniform capitalization," results in the delay of tax deductions for certain costs until the inventory is sold.

Not for the Timid

  • The basic idea is to reclassify the expenses as inventory when they pertain to pre-sale and pre-production, as well as the actual production period. You start by identifying costs subject to uniform capitalization. That can include costs of the design, bidding, purchasing, direct materials, direct labor, indirect production costs, storage, handling and excise tax. You then allocate a percentage of mixed service costs, a combination of production and administrative costs, to production. You next compute an "absorption ratio," which is the ratio of current-year additional Section 263A costs to total inventory costs. Finally, apply the ratio to indirect production costs and allocated mixed service costs, and add the result to the value of ending inventory.

Much Fine Print

  • Some companies are exempt from Section 263A for various reasons, including the size and type of business. Normally, specially trained cost accountants interpret and apply Section 263A because of its complexity. Businesses use different cost accounting practices, which means how one figures Section 263A costs will be different from another.

References

Promoted By Zergnet

Comments

You May Also Like

  • How to Study Labour Law

    Labour law is a career degree course that many universities offer. The pursuit of this coursework may extend in some cases from...

  • How to Calculate COGS

    COGS, or cost of goods sold, is a calculation frequently used in businesses to determine the direct expense of production of a...

  • How to Calculate Earnings & Profits

    To calculate and keep track of earnings and profits, a small business can take a page out of the accounting practices of...

  • How to Calculate a Unicap

    Uniform capitalization (UNICAP) is a federal tax rule that requires direct and indirect costs incurred in the production of property to be...

  • How to Calculate AMT for Corporations

    The Internal Revenue Service imposes an alternative minimum tax on corporations, under the authority of U.S. Code Title 26, Subtitle A, Chapter...

  • How to Cite the Internal Revenue Code

    Graduates who enroll in law school and undergraduate college students majoring in accounting, business, political science, finance or pre-law often cite Internal...

  • How to Calculate Equivalent Units of Work in Process

    Process costing focuses on the number of processes a company uses to produce goods. The production process is continuous, churning out homogeneous...

  • When Should Paid Royalties Be Reported As Expenses?

    Royalty payments exist in many different types of business, including music sales, book sales and various inventions. The inventor of the antihistamine...

  • Rules of Federal Tax Capitalization

    Federal tax capitalization rules disallow current tax deductions for the costs of acquiring specific types of property, costs expended to add value...

Related Searches

Check It Out

Are You Really Getting A Deal From Discount Stores?

M
Is DIY in your DNA? Become part of our maker community.
Submit Your Work!