If you are a business owner, the IRS requires you to account for and capitalize your costs. You can find the details for this in IRS Code Section 263A, which is commonly known as 263A.
Who Is Required To Calculate 263A?
If you are a manufacturer, wholesaler or retail company that brings in gross receipts that are equal to at least $10,000,000 each year, you will need to calculate 263A. Specific regulations for your business will be determined by the category of your business — such as retail, manufacturing or service.
Steps For 263A Calculation
The first step that you need to take when calculating 263A is to determine the total amount of indirect purchasing costs for your company. These would include items such as processing fees, warehousing fees, repacking, all of your purchases, support payroll costs and assembly costs. It would not include costs like R&D, distribution, advertising or marketing.
Next, you need to allocate these costs between cost of goods sold and inventory. For example, inventory would include any machinery used to produce a product, and cost of goods sold would include materials that your company uses to make products that you sell.
After you’ve allocated the cost of your inventory and cost of goods sold, you must classify all costs into three separate categories — mixed services, administrative and production. Your mixed services cost is defined as a cost that can be listed as both an administrative cost and production cost. These would be items such as data processing, purchasing or personnel department costs.
Figuring Cost Accounting
There is an abundance of time-consuming work involved when you classify your costs. Once you have that completed, you will apply your preferred cost accounting method to those classifications. If you need help determining the appropriate method for your industry, it’s advisable to consult a professional tax expert who understands the details associated with different cost accounting methods. The accounting methods that are preferred may change every few years. A tax professional can help determine which is the best method for your situation.
Completing 263A Calculations
To fully complete the calculations needed for 263A, you’ll be required to use figures and tables that are appropriate for the cost accounting method used in your specific category. This guide gives you a basic understanding of how the calculation for 263A works, but it is not intended to act as a full breakdown of the complete process. Be sure to hire a professional tax expert if you need help with this calculation.
Jim Treebold is a North Carolina based writer. He lives by the mantra of “Learn 1 new thing each day”! Jim loves to write, read, pedal around on his electric bike and dream of big things. Drop him a line if you like his writing, he loves hearing from his readers!