What Are the Uniform Capitalization Rules?
Section 263A of the Internal Revenue Code deals with the capitalization and inclusion of certain costs in inventory. For example: • Manufacturers must include the cost of direct labor and materials and certain indirect costs related to overhead in the cost of finished goods. • Merchants who purchase inventory for resale must include shipping expenses in the cost of goods sold. However, under Revenue Procedure 2002-28, for taxpayers exempted from using the accrual method, the uniform capitalization rules under IRC Section 263A DO NOT APPLY. Revenue Procedure 2002-28 allows inventoriable items to be accounted for as nonincidental materials and supplies under Reg. 1.162-3. What it Means to Capitalize a Cost To capitalize a cost simply means you do not take an immediate deduction for the cost of the item(s). Instead, you initially set up the cost in your books as an asset by debiting the cost to an asset account such as an Inventory account. The cost in the Inventory account is eventually
