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Focus on Automotive: New Ruling on Uniform Capitalization Costs Will Benefit Auto Dealers

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The Internal Revenue Service (IRS) has finally issued its long awaited final ruling on uniform capitalization costs under Code Section 263A, also referred to as UNICAP.
December 6, 2010

The Internal Revenue Service (IRS) has finally issued its long awaited final ruling on uniform capitalization costs under Code Section 263A, also referred to as UNICAP.

This has been an issue in several recent audits of dealerships, where IRS agents have proposed new interpretations of these regulations resulting in significant tax liabilities for the dealerships under audit. The resolution of this issue comes as a large victory for the National Auto Dealers Association (NADA) and dealerships around the country.

The new IRS rules did not completely eliminate UNICAP for motor vehicle dealerships; however the new guidance has drastically reduced the amount of direct and indirect costs required for capitalization and has favorably resolved several of the industry’s tax questions and concerns.

Original Legislation

The original tax law was enacted in 1986 and generally required retailers and producers to capitalize certain direct and indirect costs related to inventory. These costs included direct acquisition costs, as well as indirect purchasing, handling and storage costs.

The lack of clear guidance in the previous rules had created considerable discussion within the industry over which direct and indirect costs needed to be capitalized for compliance with existing tax rules.

Safe Harbor Elections

Revenue Procedure 2010-44, effective November 9, 2010, now allows certain dealerships to elect one or both of the new ‘safe harbor” accounting methods for UNICAP.

The first “safe harbor” election will allow eligible dealerships to treat their entire sales facility, including additional vehicle lots, as a retail sales facility. This election allows dealerships to expense handling and storage costs incurred at the retail sales facility for tax purposes.

The second “safe harbor” election will allow eligible dealerships to treat themselves as a reseller without production activities. Under this “safe harbor” election, the cost of any handling activities, other than the cost of vehicle parts, that a dealership incurs on dealership owned vehicles and customer owned vehicles can be expensed for tax purposes.

In order to take advantage of these new “safe harbor” accounting methods for UNICAP, dealerships need to file for an automatic change in accounting method with the IRS.

 

Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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