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New Client Never Claimed Inventory 3115 / TCJA Changes

Technical topics regarding tax preparation.
#1
JStiles  
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I have picked up a new client for 2018. They are a manufacturer with both raw and finished goods inventory (Under $25 Million). Historically, they simply expensed all purchases of raw materials. My intention when I picked up the client was to research the applicable 3115 Codes and make an adjustment.

In researching the 3115 Codes, I saw several articles questioning whether or not a small taxpayer needs to report inventory. Some articles seem to state it is only for §263(a) items and other articles seem to indicate it includes all inventory costs. It seems that guidance is very much needed on this issue. The client has historically not recorded inventory in their books (QuickBooks).

I have googled the topic and the "guidance" is inconsistent.

I am looking for ideas on this topic, CPE opportunities to study further, and any points in the right direction!

Thoughts? Comments? Ideas?
 

#2
Coddington  
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The most thorough treatment of this issue in an authorative document is the discussion in the Joint Committee on Taxation's Blue Book. The JCT came to the conclusion that Congressional intent was that: 1) if a manufacturer elects non-incidental material and supply treatment under Code section 471; 2) makes the DMSH election under section 1.263(a)-1(f); and, 3) expenses its inventory on its books and records, then the taxpayer may expense its inventory for Federal income tax purposes. In your client's situation, you could probably get by with making a method change to non-incidental material and supply treatment for the inventory because, in the absence of a DMSH election, it would result in a timing difference compared to their current expensing treatment. The DMSH election in the prior year would appear to dictate the amount of the section 481(a) adjustment.
-Brian
Tax accounting methods and credits consultant for hire.

http://www.coddingtontax.com
 

#3
JStiles  
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I appreciate the reply, thank you!
 

#4
JStiles  
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Working through your answer, trying to understand.

In taking a second look at the return, no DMSH (or any other elections) were make in 2017.

If I understand the new rules correctly, the client cannot deduct inventory until it is provided to the customer (would I not be right back to tracking inventory?). I am not sure I am reading that correctly - possibly over-thinking the whole thing.

If I use the method change (235), the 481(a) adjustment would be the total of raw and finished good inventory? The amount will be allocated over 4 years.

Thank you in advance!
 

#5
Coddington  
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Based on what I'm hearing from Chief Counsel, the 481(a) adjustment would be the 12/31/2017 balance of WIP and FG. Raw materials would remain on the balance sheet until transferred to WIP.
-Brian
Tax accounting methods and credits consultant for hire.

http://www.coddingtontax.com
 

#6
JStiles  
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Thank you!

It is helpful to me to put numbers to the situation to make sure I understand.

The 2017 Balance reported Inventory of $0.00 (No Raw, No WIP, No FG). It should have reported Raw Materials of $1,000, Work In Process of $1,000, and Finished Goods of $10,000. (The actual numbers are much higher, these are just examples.)

Since no Inventory was reported, the 481(a) Adjustment would be only the $1,000 of Raw Materials? To in effect add it back to the balance sheet? (Referencing the statement about - leaving the Raw Materials on the Balance Sheet until transferred to Work-In-Process.)

Also, if I understand your last post, if the Inventories noted above had been reported on the 2017 return, then the 481(a) Adjustment would have been $11,000 (The FG and WIP). Is that correct? (Referencing the 481(a) Adjustment would be the WIP and FG.) I think I understand that this second situation (not my client's) is what normally would occur.

I am grateful for this Board and your help!
 

#7
Coddington  
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Yes, it would be $1000. Yes, it would have been $11k, the balance of the WIP and FG accounts.

No problem.
-Brian
Tax accounting methods and credits consultant for hire.

http://www.coddingtontax.com
 

#8
JStiles  
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Perfect! Thank you kindly!
 


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