Rev. Proc. 2014-33, 2014-22 I.R.B. 1, issued May 6, provides taxpayers with automatic accounting method change procedures for sales-based royalties and sales-based vendor chargebacks to comply with final regulations (T.D. 9652) issued in January 2014.
The revenue procedure modifies Rev. Proc. 2011-14, 2011-4 I.R.B. 330 and the comprehensive automatic accounting method procedures by adding three new automatic method changes:
1. Sales-based royalties under Section 263A
2. Sales-based vendor chargebacks under a simplified Section 263A method
3. Sales-based vendor chargebacks under Section 471
The first method change relates to treatment of sales-based royalties under Section 263A. Sales-based royalties are royalty costs incurred only upon the sale of the property produced or acquired for resale. Under the final regulations, taxpayers must capitalize these costs under Section 263A; however, those costs may be allocated entirely to the cost of goods sold or between the cost of goods sold and ending inventory. The new automatic method change allows taxpayers to comply with these rules with some exceptions. Taxpayers that want to change to capitalizing sales-based royalties and allocating that to inventory using a reasonable method will not be able to do so under the automatic procedures. Additionally, to be eligible under the automatic change, taxpayers using a simplified method must remove sales-based royalties allocated to the cost of goods sold from the formulas used to allocate Section 263A costs to ending inventory in the same manner that the taxpayer included these amounts in the formulas.
The second new automatic method change relates to sales-based vendor chargebacks under a simplified Section 263A method. Sales-based vendor chargebacks are an allowance, discount or price rebate to which a taxpayer becomes unconditionally entitled by selling a vendor's merchandise to specific customers identified by that vendor at a price the vendor determines. Under the final regulations, sales-based vendor chargebacks are required to be treated as a reduction of the cost of goods sold.
Taxpayers using a simplified uniform capitalization (UNICAP) method would often include negative additional Section 263A costs in the numerator of the simplified formulas, which does not comply with the final regulations. The new automatic method changes allow taxpayers to stop including such adjustments in their simplified UNICAP calculation.
The third new automatic method change relates to accounting for sales-based vendor chargebacks. This change allows taxpayers to change their method to treat sales-based vendor chargebacks as a reduction in the cost of goods sold in accordance with the final regulations.
Most of the general scope limitations, such as being under exam or having made a change within the past five years, are waived for all three changes for a taxpayer's first and second taxable years ending on or after Jan.13, 2014.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
