Publication 538 - Accounting Periods And Methods (Page 16 of 19) in pdf

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If you do not use LIFO and you previously

Disaster loss. If your inventory loss is due to a

Property produced under a long-term con-

figured inventories without eliminating mark-

disaster in an area determined by the President

tract, except for certain home construction

downs in making adjustments to retail selling

contracts described in section 460(e)(1).

of the United States to be eligible for federal

prices, you can continue this practice only if you

assistance, you can choose to deduct the loss

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Timber and certain ornamental trees

first get IRS approval. You can adopt and use

on your return for the immediately preceding

raised, harvested, or grown, and the un-

this practice on the first tax return you file for the

year. However, you must also decrease your

derlying land.

business, subject to IRS approval on examina-

opening inventory for the year of the loss so the

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tion of your tax return.

Qualified creative expenses incurred as a

loss will not show up again in inventory.

free-lance (self-employed) writer, photog-

Figuring income tax. Resellers who use the

rapher, or artist that are otherwise deducti-

Uniform Capitalization Rules

retail method of pricing inventories can figure

ble on your tax return.

their tax on that basis.

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Under the uniform capitalization rules, you must

Costs allocable to natural gas acquired for

To use this method, you must do all the

capitalize the direct costs and part of the indirect

resale to the extent these costs would oth-

following.

costs for production or resale activities. Include

erwise be allocable to “cushion gas”

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these costs in the basis of property you produce

stored underground.

State that you are using the retail method

or acquire for resale, rather than claiming them

on your tax return.

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Property produced if substantial construc-

as a current deduction. You recover the costs

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tion occurred before March 1, 1986.

Keep accurate records.

through depreciation, amortization, or cost of

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goods sold when you use, sell, or otherwise

Property provided to customers in connec-

Use this method each year unless the IRS

dispose of the property.

tion with providing services. It must be de

allows you to change to another method.

minimus in amount and not be inventory in

Special uniform capitalization rules ap-

the hands of the service provider.

You must keep records for each separate

ply to a farming business. See chapter

department or class of goods carrying different

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7 in Publication 225.

CAUTION

Loan origination.

percentages of gross profit. Purchase records

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The costs of certain producers who use a

should show the firm name, date of invoice,

simplified production method and whose

invoice cost, and retail selling price. You should

total indirect costs are $200,000 or less.

also keep records of the respective departmen-

Activities subject to the rules. You are sub-

See section 1.263A – 2(b)(3)(iv) of the reg-

tal or class accumulation of all purchases, mark-

ject to the uniform capitalization rules if you do

ulations for more information.

downs, sales, stock, etc.

any of the following, unless the property is pro-

duced for your use other than in a trade or

Qualified creative expenses. Qualified

business or an activity carried on for profit.

Perpetual or Book Inventory

creative expenses are expenses paid or in-

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Produce real or tangible personal prop-

curred by a free-lance (self-employed) writer,

You can figure the cost of goods on hand by

erty.

photographer, or artist whose personal efforts

either a perpetual or book inventory if inventory

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create (or can reasonably be expected to cre-

Acquire property for resale. However, this

is kept by following sound accounting practices.

ate) certain properties. These expenses do not

rule does not apply to personal property if

Inventory accounts must be charged with the

include expenses related to printing, photo-

your average annual gross receipts are

actual cost of goods purchased or produced and

graphic plates, motion picture films, video tapes,

$10 million or less.

credited with the value of goods used, trans-

or similar items.

ferred, or sold. Credits must be figured on the

These individuals are defined as follows.

Producing property. You produce property

basis of the actual cost of goods acquired during

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if you construct, build, install, manufacture, de-

A writer is an individual who creates a

the year and their inventory value at the begin-

velop, improve, create, raise, or grow the prop-

literary manuscript, a musical composition

ning of the tax year.

erty. Property produced for you under a contract

(including any accompanying words), or a

is treated as produced by you to the extent you

dance score.

Physical inventory. You must take a physical

make payments or otherwise incur costs in con-

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inventory at reasonable intervals and the book

A photographer is an individual who cre-

nection with the property.

figure for inventory must be adjusted to agree

ates a photograph or photographic nega-

with the actual inventory.

Tangible personal property. Tangible per-

tive or transparency.

sonal property includes films, sound recordings,

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An artist is an individual who creates a

video tapes, books, artwork, photographs, or

Loss of Inventory

picture, painting, sculpture, statue, etch-

similar property containing words, ideas, con-

ing, drawing, cartoon, graphic design, or

cepts, images, or sounds. However, free-lance

You claim a casualty or theft loss of inventory,

original print item. The originality and uni-

authors, photographers, and artists are exempt

including items you hold for sale to customers,

queness of the item created and the pre-

from the uniform capitalization rules if they qual-

through the increase in the cost of goods sold by

dominance of aesthetic value over

ify.

properly reporting your opening and closing in-

utilitarian value of the item created are

ventories. You cannot claim the loss again as a

taken into account.

Exceptions. The uniform capitalization rules

casualty or theft loss. Any insurance or other

do not apply to:

reimbursement you receive for the loss is taxa-

Personal service corporation. The ex-

ble.

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emption for writers, photographers, and artists

Resellers of personal property with aver-

You can choose to take the loss separately

also applies to an expense of a personal service

age annual gross receipts of $10 million or

as a casualty or theft loss. If you take the loss

corporation that directly relates to the activities

less (small resellers).

separately, adjust opening inventory or

of the qualified employee-owner. A “qualified

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Property produced to use as personal or

purchases to eliminate the loss items and avoid

employee-owner” is a writer, photographer, or

nonbusiness property or for uses not con-

counting the loss twice.

artist who owns, with certain members of his or

nected with a trade or business or an ac-

If you take the loss separately, reduce the

her family, substantially all the stock of the cor-

tivity conducted for profit.

loss by the reimbursement you receive or expect

poration.

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to receive. If you do not receive the reimburse-

Research and experimental expenditures

Inventories. If you must adopt the uniform

ment by the end of the year, you cannot claim a

deductible under section 174.

capitalization rules, revalue the items or costs

loss for any amounts you reasonably expect to

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Intangible drilling and development costs

included in beginning inventory for the year of

recover.

of oil and gas or geothermal wells or any

change as if the capitalization rules had been in

amortization deduction allowable under

Creditors or suppliers. If your creditors for-

effect for all prior periods. When revaluing inven-

section 59(e) for intangible drilling, devel-

give part of what you owe them because of your

tory costs, the capitalization rules apply to all

inventory loss, this amount is treated as income

opment, or mining exploration expendi-

inventory costs accumulated in prior periods. An

and is taxable.

tures.

adjustment is required under section 481(a). It is

Page 16

Publication 538 - Accounting Periods And Methods Page 16

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