Taxpayers who are adopting the rules for sales-based royalties and vendor allowances under Sec. 263A and Sec. 471 provided in T.D. 9652 were given new procedures for obtaining automatic consent to accounting method changes to conform to those rules (which apply to tax years ending on or after Jan. 13, 2014) (Rev. Proc. 2014-33).
The sales-based royalty rules relate to the capitalization and allocation of royalties incurred on the sale of property produced or property acquired for resale. Sales-based vendor allowances are the adjustments to the cost of merchandise inventory for an allowance, discount, or price rebate based on merchandise sales.
In January, in response to ongoing litigation over whether sales-based royalties must be capitalized, the IRS issued regulations that permit taxpayers to either allocate sales-based royalties entirely to property sold and include those costs in cost of goods sold or to allocate sales-based royalties between cost of goods sold and ending inventory using a facts-and-circumstances cost allocation method described in Regs. Sec. 1.263A-1(f) or a simplified method.
Under the procedure, a taxpayer may change its method of accounting for sales-based royalties as permitted in T.D. 9652 in any of the following ways:
- From not capitalizing sales-based royalties to capitalizing these costs and allocating them entirely to cost of goods sold under a taxpayer’s method of accounting;
- From not capitalizing sales-based royalties to capitalizing these costs and allocating them to inventory property under a taxpayer’s method of accounting;
- From capitalizing sales-based royalties and allocating these costs to inventory property to allocating them entirely to cost of goods sold; or
- From capitalizing sales-based royalties and allocating these costs entirely to cost of goods sold to allocating them to inventory property.
A taxpayer may adopt this change by filing a Form 3115, Application for Change in Accounting Method, with its federal income tax return for the year of change with an additional copy filed with the IRS office in Ogden, Utah, in lieu of the IRS national office. This automatic procedure is not available for taxpayers that want to adopt another reasonable allocation method within the meaning of Regs. Sec. 1.263A-1(f)(4).
The regulations permit sales-based vendor chargebacks to reduce the cost of goods sold and not reduce the cost of goods on hand at the end of the tax year. A sales-based vendor chargeback is defined as an allowance, discount, or price rebate that a taxpayer becomes unconditionally entitled to by selling a vendor’s merchandise to specific customers identified by the vendor at a price determined by the vendor.
To implement this new method, the procedure allows taxpayers to change their method of accounting to no longer include cost adjustments for sales-based vendor chargebacks described in Regs. Sec. 1.471-3(e)(1) in the formulas used to allocate additional Sec. 263A costs to ending inventory under a simplified method.
A taxpayer may adopt this change by filing a Form 3115 with its federal income tax return for the year of change with an additional copy filed with the IRS office in Ogden in lieu of the national office.