How to Compute Unicap
Uniform Capitalization Rules (Unicap) as defined by Internal Revenue Code Section 263A requires taxpayers to capitalize costs -- both direct and indirect -- that are incurred during pre-sales and pre-production phases of producing products. These costs are then added to the direct-production cost of any real or tangible property produced for use in a business or sold to customers. Any property purchased for resale must also capitalize direct and indirect costs. Several specific exceptions to uniform capitalization rules exist and it is important to carefully review the regulations and guidance to comply properly.
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Instructions
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Instructions
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Identify products that are produced and products that are purchased for resale.
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Collect pre-production costs that include product design, procurement and estimating costs.
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Collect production costs that include direct-production expenses, direct labor, direct materials and indirect production costs.
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Collect pre-sale costs that include taxes, warehousing and handling.
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Collect non-production indirect costs that include utilities, rent, insurance, real estate taxes, depreciation, amortization, administration costs, non-production payroll and employee benefits.
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Collect mixed-service costs that include marketing, information technology, accounting, security and human resources.
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Total all direct costs, pre-production costs, pre-sales costs and indirect costs attributable to production and capitalize them.
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Total all mixed-service costs and allocate them on the basis of what percentage of direct and indirect costs are of all entity costs. For example, if total entity costs are $5,000,000 and total direct and indirect costs are $3,000,000, or 60 percent, then you multiply mixed-service costs by 60 percent and capitalize them.
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Tips & Warnings
Exceptions to Unicap:
Research and development expenses
Loan originations
Property used for personal use
Businesses with revenue of less than $10 million during past three tax years
Do Not Capitalize Indirect Costs for:
Selling expenses
Distribution costs
Income taxes
Warranty expenses
Product-liability costs
Unicap calculations can become very complex in some business environments. For example, industries that utilize specialized manufacturing processes that require non-production support from engineering or design groups will find it necessary to document their work flow using activity-based metrics to avoid mistakes. It is important to make sure that production costs and non-production costs are classified correctly in the general ledger before starting data collection for computing Unicap. Taxpayers are allowed to use facts and circumstances to determine the correct capitalization, but they are warned to keep detailed records of their process and methodology so they can answer questions the IRS may have in an audit.
This information does not constitute tax-preparation advice.
Consult a qualified tax accountant before filing any information with the IRS
