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pays for the raw materials or

redemption of a nonqualified per-unit

The cooperative is required to use

merchandise if it is also using the cash

retain certificate.

cost if it is using the cash method of

method). For additional guidance on

accounting.

Line 6a. Additional Section

this method of accounting for

Cooperatives that account for

inventoriable items, see Pub. 538 and

263A Costs

inventory in the same manner as

the Instructions for Form 3115.

materials and supplies that are not

An entry is required on this line only by

Enter amounts paid for all raw

incidental may currently deduct

cooperatives electing a simplified

expenditures for direct labor and all

materials and merchandise on line 2.

method of accounting.

indirect costs that would otherwise be

The amount the cooperative can deduct

For cooperatives that have elected

included in inventory costs.

for the tax year is figured on line 9.

the simplified production method,

The average cost (rolling average)

All filers not using the cash method

additional section 263A costs are

method of valuing inventories generally

of accounting should see Section 263A

generally those costs, other than

does not conform to the requirements

uniform capitalization rules on page 7

interest, that were not capitalized under

of the regulations. See Rev. Rul.

before completing Schedule A.

the cooperative’s method of accounting

71-234, 1971-1 C.B. 148.

immediately prior to the effective date

Line 1. Inventory at

of section 263A but are now required to

Cooperatives that use erroneous

Beginning of Year

be capitalized under section 263A. For

valuation methods must change to a

details, see Regulations section

method permitted for federal income tax

Beginning inventory will generally equal

1.263A-2(b).

purposes. Use Form 3115 to make this

ending inventory from last year’s return.

change.

If this is your initial year, do not make

For cooperatives that have elected

an entry on line 1.

On line 10a, check the method(s)

the simplified resale method, additional

used for valuing inventories. Under

section 263A costs are generally those

If the cooperative is changing its

lower of cost or market, the term

method of accounting for the current

costs incurred with respect to the

“market” (for normal goods) means the

tax year, it must refigure last year’s

following categories:

•

current bid price prevailing on the

closing inventory using its new method

Off-site storage or warehousing.

•

inventory valuation date for the

of accounting and enter the result on

Purchasing; handling, such as

particular merchandise in the volume

processing, assembly, repackaging,

line 1. If there is a difference between

usually purchased by the taxpayer. For

and transporting.

last year’s closing inventory and the

•

a manufacturer, market applies to the

General and administrative costs

refigured amount, attach an

basic elements of cost — raw materials,

(mixed service costs).

explanation. Take the difference into

labor, and burden. If section 263A

account when figuring the cooperative’s

For details, see Regulations section

applies to the taxpayer, the basic

section 481(a) adjustment.

1.263A-3(d).

elements of cost must reflect the

Line 4a. Per-unit Retain

current bid price of all direct costs and

Enter on line 6a the balance of

all indirect costs properly allocable to

Allocations paid in Qualified

section 263A costs paid or incurred

goods on hand at the inventory date.

during the tax year not includable on

Per-unit Retain Certificates

lines 2, 3, and 6b.

Inventory may be valued below cost

Qualified per-unit retain certificates are

when the merchandise is unsalable at

issued to patrons who have agreed to

Line 6b. Other Costs

normal prices or unsalable in the

include the stated dollar amount on the

normal way because the goods are

Enter on line 6b any costs paid or

certificate in current income.

subnormal due to damage,

incurred during the tax year not entered

imperfections, shop wear, etc., within

on lines 2 through 6a.

Line 5. Per-unit Retain

the meaning of Regulations section

Allocations paid in Money or

Line 8. Inventory at End of

1.471-2(c). The goods may be valued

Other Properties (except

at a current bona fide selling price,

Year

minus direct cost of disposition (but not

Nonqualified Per-unit

See Regulations sections 1.263A-1

less than scrap value) if such a price

Certificates)

through 1.263A-3 for details on figuring

can be established.

the amount of additional section 263A

Enter the amount paid in money or

If this is the first year the Last-in,

costs to be included in ending

other property (except per-unit retain

First-out (LIFO) inventory method was

inventory.

certificates) to patrons to redeem

either adopted or extended to inventory

nonqualified per-unit retain certificates.

If the cooperative accounts for

goods not previously valued under the

No deduction is allowed at the time of

inventoriable items in the same manner

LIFO method provided for in section

issuance for a nonqualified per-unit

as materials and supplies that are not

472, attach Form 970, Application To

retain certificate. However, the

incidental, enter on line 8 the portion of

Use LIFO Inventory Method, or a

cooperative may take a deduction in

its raw materials and merchandise

statement with the information required

the year the certificate is redeemed,

purchased for resale that is included on

by Form 970. Also check the LIFO box

subject to the stated dollar amount of

line 7 and was not sold during the year.

on line 10c. On line 10d, enter the

the certificate.

amount or the percent of total closing

Lines 10a through 10f.

The cooperative can also choose to

inventories covered under section 472.

Inventory Valuation Methods

deduct the amount paid to redeem the

Estimates are acceptable.

certificate in the prior year if redemption

Inventories can be valued at:

If the cooperative changed or

•

occurs within the payment period for

Cost,

extended its inventory to LIFO and had

•

that preceding year. See section

Cost or market value (whichever is

to write up its opening inventory to cost

1382(b).

lower), or

in the year of election, report the effect

•

See section 1383 and the

Any other method approved by the

of this write-up as income (line 10,

instructions for line 32f on page 12 for a

IRS that conforms to the requirements

page 1) proportionately over a 3-year

special rule for figuring the

of the applicable regulations cited

period beginning with the year of the

cooperative’s tax in the year of

below.

LIFO election (section 472(d)).

-13-

Instructions For Form 990-C - Farmers' Cooperative Association Income Tax Return - Internal Revenue Service - 2005 Page 13

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