Instructions For Form 1120-Ic-Disc - 2003 Page 7
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16Schedule A
For IC-DISCs that have elected the
inventory valuation date for the particular
simplified production method, additional
merchandise in the volume usually
section 263A costs are generally those
purchased by the taxpayer. If section 263A
Cost of Goods Sold
costs, other than interest, that were not
applies to the taxpayer, the basic elements
Generally, inventories are required at the
capitalized under the IC-DISC’s method of
of cost must reflect the current bid price of
beginning and end of each tax year if the
accounting immediately prior to the effective
all direct costs and all indirect costs properly
purchase or sale of merchandise is an
date of section 263A but are now required to
allocable to goods on hand at the inventory
income-producing factor. See Regulations
be capitalized under section 263A. For
date.
section 1.471-1.
details, see Regulations section
Inventory may be valued below cost
However, if the IC-DISC is a qualifying
1.263A-2(b).
when the merchandise is unsalable at
taxpayer or a qualifying small business
For IC-DISCs that have elected the
normal prices or unusable in the normal way
taxpayer, it may adopt or change its
simplified resale method, additional
because the goods are subnormal due to
accounting method to account for
section 263A costs are generally those
damage, imperfections, shopwear, etc.,
inventoriable items in the same manner as
costs incurred with respect to the following
within the meaning of Regulations section
materials and supplies that are not
categories.
1.471-2(c). The goods may be valued at the
•
incidental.
Off-site storage or warehousing.
current bona fide selling price, minus direct
•
Purchasing; handling, such as
A qualifying taxpayer is a taxpayer that,
cost of disposition (but not less than scrap
processing, assembling, repackaging, and
for each prior tax year ending after
value) if such a price can be established.
transporting.
December 16, 1998, has average annual
•
If this is the first year the Last-in,
General and administrative costs (mixed
gross receipts of $1 million or less for the
First-out (LIFO) inventory method was either
service costs).
3-tax-year period ending with that prior tax
adopted or extended to inventory goods not
year. See Rev. Proc. 2001-10, 2001-2 I.R.B.
For details, see Regulations section
previously valued under the LIFO method
272, for details.
1.263A-3(d).
provided in section 472, attach Form 970,
A qualifying small business taxpayer
Enter on line 4 the balance of section
Application To Use LIFO Inventory Method,
is a taxpayer (a) that, for each prior tax year
263A costs paid or incurred during the tax
or a statement with the information required
ending on or after December 31, 2000, has
year not includible on lines 2, 3, and 5.
by Form 970. Also check the LIFO box on
average annual gross receipts of $10 million
line 9c. On line 9d, enter the amount or the
Line 5. Other Costs
or less for the 3-tax-year period ending with
percent of total closing inventories covered
Enter on line 5 any costs paid or incurred
that prior tax year and (b) whose principal
under section 472. Estimates are
business activity is not an ineligible activity.
during the tax year not entered on lines 2
acceptable.
See Rev. Proc. 2002-28, 2002-18 I.R.B.
through 4.
If the IC-DISC changed or extended its
815, for details.
Line 7. Inventory at End of Year
inventory method to LIFO and had to write
Under this accounting method, inventory
See Regulations sections 1.263A-1 through
up the opening inventory to cost in the year
costs for merchandise purchased for resale
1.263A-3 for details on figuring the amount
of election, report the effect of the write-up
are deductible in the year the merchandise
of additional section 263A costs to be
as other income (on page 2, Schedule B,
is sold (but not before the year the IC-DISC
included in ending inventory. If the IC-DISC
line 2j or 3f), proportionately over a 3-year
paid for the merchandise, if it is also using
accounts for inventoriable items in the same
period that begins with the year of the LIFO
the cash method). For additional guidance
manner as materials and supplies that are
election (section 472(d)).
on this method of accounting for
not incidental, enter on line 7 the portion of
inventoriable items, see Pub. 538.
For more information on inventory
its merchandise purchased for resale that is
valuation methods, see Pub. 538.
Enter amounts paid for merchandise
included on line 6 and was not sold during
during the tax year on line 2. The amount
the year.
the IC-DISC can deduct for the tax year is
Schedule B
figured on line 8.
Lines 9a through 9f. Inventory
Valuation Methods
All filers not using the cash method of
Gross Income
accounting should see Section 263A
Inventories can be valued at:
If an income item falls into two or more
•
uniform capitalization rules on page 9
Cost;
categories, report each part on the
•
before completing Schedule A.
Cost or market value (whichever is lower);
applicable line. For example, if interest
If the IC-DISC uses intercompany pricing
or
income consists of qualified interest from a
•
rules (for purchases from a related supplier),
Any other method approved by the IRS
foreign international sales corporation and
use the transfer price figured in Part II of
that conforms to the requirements of the
nonqualifying interest from a domestic
Schedule P (Form 1120-IC-DISC).
applicable regulations cited below.
obligation, enter the qualified interest on an
If the IC-DISC acts as another person’s
However, if the IC-DISC is using the
attached schedule for line 2g and the
commission agent on a sale, do not enter
cash method of accounting, it is required to
nonqualifying interest on an attached
any amount in Schedule A for the sale. See
use cost.
schedule for line 3f.
Schedule P (Form 1120-IC-DISC).
IC-DISCs that account for inventoriable
For gain from selling qualified export
items in the same manner as materials and
Line 1. Inventory at Beginning
assets, attach a separate schedule in
supplies that are not incidental may
addition to the forms required for lines 2h
of Year
currently deduct expenditures for direct
and 2i.
If the IC-DISC is changing its method of
labor and all indirect costs that would
accounting for the current tax year, it must
Nonaccrual experience method.
otherwise be included in inventory costs.
Corporations that qualify to use the
refigure last year’s closing inventory using
The average cost (rolling average)
the new method of accounting and enter the
nonaccrual experience method (described
method of valuing inventories generally
result on line 1. If there is a difference
on page 4), should attach a schedule
does not conform to the requirements of the
between last year’s closing inventory and
showing total gross receipts, the amount not
regulations. See Rev. Rul. 71-234, 1971-1
accrued as a result of the application of
the refigured amount, attach an explanation
C.B. 148.
and take it into account when figuring the
section 448(d)(5), and the net amount
IC-DISCs that use erroneous valuation
IC-DISC’s section 481(a) adjustment
accrued. Enter the amount on the applicable
methods must change to a method
line of Schedule B.
(explained on page 4).
permitted for Federal income tax purposes.
Line 4. Additional Section 263A
Commissions: Special Rule
Use Form 3115 to make this change.
Costs
On line 9a, check the method(s) used for
Note: United States, as used in the
An entry is required on this line only for
valuing inventories. Under lower of cost or
following instructions, includes Puerto Rico
IC-DISCs that have elected a simplified
market, the term “market” (for normal goods)
and U.S. possessions, as well as the 50
method of accounting.
means the current bid price prevailing on the
states and the District of Columbia.
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Instructions for Form 1120-IC-DISC
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