Corporate Headquarters
6000 Western Place, Ste 800
Fort Worth, TX 76107
817.732.5494

Regional Business Development Contacts:

Texas Gulf Coast Region:
Candace Willingham

Midwest Region:
Diane Smith

Northeast Region:
Jennifer Weston

Southeast Region:
David DeGrand

South Central Region:
Jennifer Chin

Pacific Northwest Region:
Laura Collins

Upper Midwest Region:
Al Schmitt

Capitalization Relief

When the Tax Reform Act of 1986 introduced the idea of Uniform Capitalization, it left many of us scratching our heads and asking "Why?" Why did the IRS come up with such complex rules for a calculation which results in such small dollars? Why are they requiring retailers to capitalize expenses such as handling cost?

After eight years of being asked those questions, the IRS came out with a new set of rules. The new rules simplify the computation, and allow most retailers the option of returning to the days of expensing their handling cost. The two most significant changes in the final regulations are:

1. Historic Absorption Ratio Method

To simplify the Uniform Capitalization calculation, the IRS is allowing the use of a historic absorption ratio. To compute the ratio, you average the prior three years' capitalization ratios (the test period). This new ratio will be effective for five years (the qualifying period). In the sixth year, you must compute the actual combined absorption ratio. This ratio will decide if a new three year test period is required, or if you can continue using the original historic absorption ratio.

To elect the Historic Absorption Ratio Method, no Form 3115 is necessary. You merely attach an information sheet to the tax return. We recommend all automobile dealers subject to capitalization make this election. It will save you time and money.

2. Change in Cost Required to be Capitalized

The original regulations required the capitalization of certain handling cost. Recently released final regulations do not require capitalization of handling cost incurred at a retail facility for property sold to retail customers.

To elect this method, a Form 3115 is necessary. This may require IRS user fees, recalculation of prior years ratios, amending prior years' tax returns, and Form 3115 preparation fees. We recommend only those automobile dealers with significant handling costs make this change.

If you would like to discuss these new rules in more detail contact Stanton Williams at (817) 732-5494.