Tax Insights

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What happened to my 263A (A)djustment?

263A, tax reform, IRSFirst, let us explain IRC Section 263A since most people (non-accountants) probably have no idea what I am talking about, because it is something their CPA does behind the scenes and is often hard to explain. 263A requires certain costs that are normally expensed to now be capitalized as part of inventory for tax purposes. The rules apply to real or tangible personal property produced by the taxpayer AND real or personal property acquired by the taxpayer for resale. Super quick summary, but like most of the tax code, there are lots of ins and outs. Let us focus on the changes that were implemented.

As I prepared for this blog topic, I pulled up the “old” code and the changes which explain how the code was amended in the new bill. This is what I read first…

New bill (code)

“263A(b)(2) is amended to read as follows: PROPERTY ACQUIRED FOR RESALE. – Real or personal property described in section 1221(a)(1) which is acquired by the taxpayer for resale.”

Old code

263A(b)(2) PROPERTY ACQUIRED FOR RESALE. – 263A(b)(2)(A) IN GENERAL. – Real or personal property described in section 1221(a)(1) which is acquired by the taxpayer for resale.

So here are your changes from the old to the new, are you ready?… they took out the “(A)”!

Did you miss that? Because I most certainly did the first time I read it and during the first 15 minutes I stared in confusion at how the amendment was an amendment at all!

Ok, so maybe I’m not the quickest at reading tax reform bills (as a Millennial, it’s not like I had much practice). Dropping the “(A)” also meant they dropped 263A(b)(2)(B) and 263A(b)(2)(C), which gave an exception for taxpayers with gross receipts of $10 million or less and gave detail on the aggregation rules. They then added in a new subsection “(i)”. (I know what you’re thinking… there is already a subsection “(i)”). The previous subsection “(i)” was redesignated as subsection “(j)”, are you following? Didn’t think so. I’ll get to the point.

The new subsection “263A(i)” ties in the gross receipts test from the limitation on cash method accounting. The gross receipts test for the limitation on cash method accounting is now the exception for taxpayers when it comes to determining whether they need a 263A adjustment for tax purposes. This new gross receipts limitation increased from $5 million to $25 million and is still based on the average annual gross receipts for the 3-taxable-year period. It is also adjusted for inflation each year.

To sum this all up for you, the exception for certain small businesses regarding 263A adjustments has increased from $10 million to $25 million and will now be adjusted each year for inflation.

As always, there is more to tax code. If you have any questions or concerns, please contact your tax advisor.