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Additional § 263A Costs in Beginning Inventory 800,000
Additional § 263A Costs in 2019 Increment 100,000
Total 2019 Ending Inventory $13,900,000
X’s Unamortized 2019 § 481(a) Adjustment:
2019 § 481(a) Adjustment $800,000
Amount included in 2019 Taxable Income <200,000>
Unamortized 2019 § 481(a) Adjustment—12/31/19 600,000
Because X’s average annual gross receipts of $27,000,000 for the three taxable
years immediately preceding 2020 exceeded the $26,000,000 threshold, X failed to
qualify for the small business taxpayer exemption for 2020 and was required to continue
using the UNICAP method for its inventory costs. Furthermore, X was required to
include $200,000 of the unamortized 2019 positive § 481(a) adjustment in its 2020
taxable income. Assume that X was required to add $100,000 of additional § 263A
costs to the cost of its 2020 ending inventory because of the $1,000,000 increment for
2020.
X’s 2020 Ending Inventory:
Beginning Inventory (With UNICAP costs) $13,900,000
2020 Increment 1,000,000
Additional § 263A Costs in 2020 Increment 100,000
Total 2020 Ending Inventory $15,000,000
X’s Unamortized 2019 § 481(a) Adjustment:
Unamortized 2019 § 481(a) Adjustment—12/31/19 $600,000
Amount Included in 2020 Taxable Income <200,000>
Unamortized 2019 § 481(a) Adjustment—12/31/20 $400,000
Because X’s average annual gross receipts of $25,000,000 for the three taxable
years immediately preceding 2021 did not exceed the $26,000,000 threshold, X
satisfied the small business taxpayer exemption under section 263A(i) for 2021 and
may change voluntarily from the UNICAP method to a method that no longer capitalizes
costs under § 263A for 2021, as provided in section 12.16 of this revenue procedure.
To reflect the removal of the additional § 263A costs from the cost of its 2021 beginning
inventory, X must compute a corresponding § 481(a) adjustment, which is a negative
$1,000,000 ($14,000,000 - $15,000,000). The entire amount of this negative § 481(a)
adjustment is included in X’s taxable income for 2021. In addition, X must take the
$400,000 remaining portion of the unamortized 2019 § 481(a) adjustment into account
in its taxable income for 2021, as provided in section 12.16(5) of this revenue
procedure.