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§ 263A Uniform Capitalization

March 08, 2011

In November 2010 the Internal Revenue Service released Revenue Procedure 2010-44 regarding the treatment of § 263A Uniform Capitalization (UNICAP) costs for motor vehicle dealerships.

Revenue Procedure 2010-44 offers dealers two safe harbors relating to UNICAP.   The first safe harbor allows dealerships to elect to treat all handling and storage costs incurred at certain sales facilities as fully deductible when incurred.  The second safe harbor allows dealers to elect to be treated as resellers and thus deduct the cost of all labor performed on both customer and dealership owned vehicles.  All automobile dealers are impacted by Revenue Procedure and must file Form 3115 for 2010 to elect these new methods.

In order to elect these safe harbors, the dealership must meet certain technical requirements in order to qualify. The IRS currently contends that all automobile dealers are NOT compliant with the UNICAP rules.  Failure to file the accounting method changes set forth in Revenue Procedure 2010-44 could expose dealers to significant adjustments when under audit.

Many dealerships and their CPAs have failed to appropriately address the UNICAP requirements when preparing and filing tax returns.  Prior to 2007 this was an issue that IRS generally did not consider in examination situations, however be assured that this has changed.

The Revenue Procedure is extremely favorable to automobile dealers and offers clarity on a subject that caused much heartache to dealerships over the last several years.  Please do not hesitate to contact Rick Parmelee CPA, or 860-570-6492 with questions or concerns relating to this matter.


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