Accounting method change cuts inventory costs 30 percent

Our client’s need

Our client is a leading designer, marketer, and distributor of high-quality fashion eyewear in North America and, consequently, maintains a significant investment in inventory that is subject to the uniform capitalization (UNICAP) rules under section 263A. In general, the UNICAP rules require taxpayers to capitalize additional costs to inventory such as inventory purchasing, storage/handling, and an allocable portion of inventory related to general and administrative (G&A) expenses. The client’s UNICAP calculation had not been reviewed or updated in several years and, due to growth in the inventory levels and the materiality of the UNICAP adjustment, the tax engagement team recommended Baker Tilly’s national accounting methods group specialists review the UNICAP calculations to determine whether the methodology was tax compliant and optimal.

Baker Tilly solution

Through a detailed review of the client’s business operations and inventory accounting procedures and calculations, the Baker Tilly accounting methods specialists identified opportunities to accelerate inventory deductions for non-capitalizable costs and by electing alternative allocation and capitalization methods. After presenting our findings and recommendations to the client, an accounting method change application (Form 3115) was filed to implement the proposed UNICAP methodology.

Results achieved

As a result of the accounting method change, our client reduced the amount of capitalized inventory costs by approximately 30 percent. Moreover, this benefit is expected to increase over time commensurate with anticipated growth in inventory and sales levels. Thus, the client will continue to benefit from the new UNICAP methodology prospectively and can employ the tax savings realized from the method change to finance further expansion of its operations. We also provided our client with the custom documentation and templates necessary to maintain and sustain the new methodology in future years.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.