• The Uniform Capitalization Rules (“UCR”)
related to resellers require that certain
additional costs associated with property
acquired for resale be treated as inventoriable
• The UCR related to producers/manufacturers
require capitalization of indirect costs which are
properly allocable to property that is produced
• Exception for small resellers (average annual
gross receipts not exceeding $10 million for
preceeding 3 years)
• UNICAP creates an M-1 that is a temporary
book/tax difference
• MLR has a UNICAP template for resellers and
for producers in K: Engagement Templates/
Workpaper Templates/Tax Workpapers
• If client already has a calculation they have been
using, we generally stay with that method
• Client may fill out some of the data in the 263A
calculation worksheet or we may complete it
based on client information
UNICAP – Reseller
• “SR Method – Reseller” tab is the better calculation, but for some clients
were are using the oversimplified version on the “UNICAP – Reseller”
method , or a similar calculation method
• We determine the capitalizable costs based on the ratio of purchasing
salaries to total salaries; in our example template, there is a separate bucket
of capitalizable purchasing costs and capitalizable storage & handling costs
• An absorption ratio is calculated for each – based on capitalizable costs over
book costs for purchases or beginning inventory
• Combined absorption ratio is then applied to the ending inventory balance
to determine the UNICAP adjustment to ending inventory
• The M-1 for current year taxable income is the difference between the
current year and prior year UNICAP adjustment amounts
• Most of the inputs will come from the client, from the TB, from the P&L
statement in the AFS, or a combination – preparers should look to prior year
and/or RP guidance
• On the method using the “oversimplified” version of
the reseller calculation with just a single absorption
ratio (different formula but same result)
• Workpaper includes a tie-out of book COGS and tax
COGS for Schedule 1125-A (and a check figure for tax
• Form 8916-A Part I – COGS for M-3 filer
• Additional 263A costs on line 2n as a permanent
• UNICAP Adjustment to ending inventory on line 6 as
a temporary difference (in this case the adjustment is
shown against beginning and ending inventory,
which I believe is more correct, but you may also see
the adjustment against the purchases instead)
UNICAP – Production
• Same concept, but allocation of G&A costs based
on ratio of production labor costs to total labor
• Inputs will come from TB, info from client, AFS,
or likely a combination – look to PY and
guidance from RP
• Presentation on tax return forms 1125-A and
8916-A is the same

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