What is UNICAP?

Chris Wittich

UNICAP is short for Uniform Capitalization.  That probably doesn’t even help explain it.  The IRS Code Section 263A is all about the Uniform Capitalization rules.  In general UNICAP is the amount of costs that a company needs to capitalize related to their inventory.  As you might suspect, that means it only applies to companies with inventory.  Any company that produces real or tangible personal property or acquires it for resale might need to apply the UNICAP rules and have a UNICAP adjustment.

As with any Code Section there are exceptions to the UNICAP rules.  The biggest exception is that companies with average gross receipts of $25M or less over the past three years are exempt.  That means a little company with small sales and small inventory numbers doesn’t need to bother making a UNICAP adjustment, which would just be tiny anyway.  The UNICAP only applies to those companies with over $25M in gross receipts.

The UNICAP adjustment takes a method of determining how much of the indirect costs need to be capitalized into the inventory.  The direct costs to produce real or tangible property are already included in the inventory, but there are many indirect costs which are not included at all.  There isn’t one formula or calculation that the IRS requires you to use.  Each company can come up with a method that makes sense based on their situations.  Normally when we do a calculation, we determine which of those indirect costs need to be partially allocated to the inventory operation of the business.  Then we multiply that by the percentage of purchases that are left as inventory at the end of the year.  That number changes each year so the first year the UNICAP adjustment will increase taxable income, but in future years the adjustment could be either positive or negative.

Contact us for additional information on this topic.


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