Section 263A Calculation – Anyone?

Let me start out by stating, I feel I am a pretty intelligent person.  Passed the CPA exam the first time (way back when it was given in four parts with a pencil and calculator) and have a masters degree in taxation but Section 263A befuddles me.  Yes I know who it applies to, manufacturers, wholesalers and retailers with average annual gross receipts of $10 million for the preceding three years but after that, stumped.  Could it be I have an aversion to cost accounting? I really did hate that course in college.   I understand the concept, matching the costs of producing goods with the revenues received from selling those goods, got it.  But why do they make it so difficult to apply the uniform capitalization rules?

I have worked for respectable firms with very bright accountants and the general consensus is - no one knows how to do it or they are not exactly sure they are doing it right.  This became very evident to me recently.  I have a client that underwent a Federal tax audit a few years back and one of the areas that was chosen for examination was the Section 263A calculation.  This was not surprising to me because this is a very subjective area and very open to interpretation.  The agent examined my calculation and for the most part agreed with my figures. The only change was the absorption ratio.  He stated that based upon his experience, for the type of industry my client was in, it should have been higher.  How do you refute this position? Hmmm.  Not sure but since I was dealing with a timing issue and the adjustment being very small,  I agreed to the change.  I actually felt a sense of accomplishment that maybe I had finally gotten it. 

This feeling was short lived.  The same client was examined the following year and one of the areas the agent chose to focus on was surprise, surprise Section 263A. 

Being that this area was recently examined and I had followed the audit methodology, I felt comfortable and self assured that there would be no change to my calculation.  The IRS brought in a Section 263A specialist to examine the calculation.  Really, there are people who actually audit this area every day, no thanks.... 

With confidence I gave him my workpapers.  How bad could it be? This was just audited the year before and for the most part, no change.  I followed the previous auditor's methodology and documented the workpapers up the ying yang.  After his very thorough review of my calculation, he determined that my absorption ratio was too low.  I said "how can this be, I followed the previous agents workpapers, calculations and methodology, how can it be to low?"  He looked at me, smiled and said "No one really knows how to do it." Not even the IRS!
 

This blog

Ann Callari, CPA, MST is a Senior Tax Manager at the NJ Regional Firm, Rotenberg Meril Solomon et al in Saddle Brook, NJ. Ann founded and heads the firm’s tax department. She specializes in corporate and partnership taxationas well as multi-state compliance issues. Ann has always worked in public accounting and enjoys the tremendous challenge of staying abreast of the ever-changing tax laws. She feels public accounting keeps you sharp and on your toes. Ann is a working mother who continually juggles the demands of the children she adores and the career that she is passionate about. She looks forward to sharing her tax knowledge and professional experiences with her fellow bean counters and encourages a healthy exchange of ideas and commentary.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.

44580

Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.

77176

Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.

49576

Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

90698
Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.
21492

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".

56819

William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.

81979

Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (www.ubcc.com), a software development firm of high-volume, high-productivity accounting and payroll technology.

25682

Eva Rosenberg, MBA, EA, is the publisher of TaxMama.com, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.

65382

Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

35166
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
104171
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.
26837

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

53749
Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
28754
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.
33110

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.

102117

The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.

34417

FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.

113202

Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.

62313

Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

40472
Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.
67495

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of Yellowbook-CPE.com a website devoted to training for governmental auditors.

93593

AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish AccountingWEB.co.uk share their ideas, insights, and perspectives from across the pond.

54669