Sect. 263A: Allocating Direct and Indirect Costs

1 Presenting a live 110 minute teleconference with interactive Q&ASect 263a : Allocating Direct and Indirect CostsSect. 263a : Allocating Direct and Indirect CostsMastering Established and Evolving Regs, Guidance and Rulings1pm Eastern | 12pm Central | 11am Mountain | 10am PacificTUESDAY, DECEMBER 20, 2011 Today s faculty features:1pm Eastern | 12pm Central | 11am Mountain | 10am PacificMichael Lueck Director Washington National Tax Practice KPMG Washington D CMichael Lueck, Director, Washington National Tax Practice, KPMG, Washington, Peterson, Tax Manager, RSM McGladrey, MinneapolisDonald A. Barnes, Principal, Law Offices of Donald A.

2 Barnes, PLLC, Washington, this program, attendees mustlisten to the audio over the refer to the instructions emailed to the registrant for the dial-in can still view the presentation slides online. If you have any questions, pleasecontactCustomer Service at1-800-926-7926 ext. MaterialsIf you have not printed the conference materials for this program, please complete the following steps: Click on the + sign next to Conference Materials in the middle of the left-hand column on your screen hand column on your screen. Click on the tab labeled Handouts that appears, and there you will see a PDF of the slides for today's program.

3 Double click on the PDF and a separate page will open. Double click on the PDF and a separate page will open. Print the slides by clicking on the printer Education CreditsFOR LIVE EVENT ONLYA ttendees must listen to the audio over the telephone. Attendees can still view the presentation slides online but there is no online audio for this program. Please refer to the instructions emailed to the registrant for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 18009267926 ext. for Optimal QualitySd QlitSound QualityFor this program, you must listen via the telephone by dialing 1-866-873-1442 and entering your PIN when prompted.

4 There will be no sound over the web ect o .If you dialed in and have any difficulties during the call, press *0 for assistance. Yo u m a y a l s o send us a chator e-mail so we can address the QualityTo maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key againpress the F11 key 6A Allti Di t d Sect. 263a : Allocating Direct and Indirect Costs SeminarDec. 20, 2011 Kari Peterson, RSM Lueck, A. Barnes, Law Offices of Donald , d ay s ProgramFundamental Sect. 263a Concepts[Michael Lueck and Kari Peterson]Slide 7 Slide 30 Relevant Sect. 263a Guidance[Michael Lueck and Kari Peterson]Slide 31 Slide 47 Ongoing Compliance Challenges Under Sect.

5 263a [Donald A. Barnes]Slide 48 Slide 58 NoticeANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OFCLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any py gytax opinions, memoranda, or other tax analyses contained in those information contained herein is of a general nature and based on authorities that are subject to change.

6 Applicability of the information to specific situations should be jgppypdetermined through consultation with your tax adviser. 2011 KPMG LLP, a Delaware limited liability partnership and the member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ( KPMG International ), a Swiss entity. Mi h l Lk KPMGFUNDAMENTAL SECT 263a Michael Lueck, KPMGKari Peterson, RSM McGladreyFUNDAMENTAL SECT. 263a CONCEPTSSect. 263a Inventory AnalysisGeneral Introduction Why care now?

7 Y-IRS audit approach is to manage risk or reduce capitalizable Costs -Mixed service Costs are a Tier I issue-Mixed service Costs are a Tier I issue What does it apply to?-Produced inventory-Purchased inventory-Self-constructed assets9 Sect. 263a Computational Steps Step 1p-Identify inventory Costs reflected on financial statements (full absorption) Step 2-Identify additional Sect. 263a inventoriable Costs Step 3-Allocate inventory Costs between ending inventory and cost of goods sold10 Step 1 Understand FullAbsorption Inventory Methodpy Required prior to enactment of Sect. 263 Aqp Sect. 471 Costs (key term)- Direct production Costs - Direct production Costs - Indirect production Costs Category 1: Always capitalized Category 2: Not capitalized Category 3.

8 Possibly capitalized but generally related to production activities11 Step 1 Full Absorption Indirect cost Allocation Methods Burden rate-Objective Allocate appropriate amount of Indirect production Costs to ending inventory-Operation Use pre-determined rates to approximateOperation Use predetermined rates to approximate Costs -Adjustment Variances, if material, adjust ending inventoryinventory Standard costRilltiftititih d-Requires allocation of net positive or negative overhead variance to ending inventory-Standard/budgeted Costs used to approximate costs12 Step 2 Identify And Allocate Additional Sect. 263a Costs Regulations identify 23 types of Indirect production share of administrative, service or support functions Determine what Costs are already capitalized under taxpayer sDetermine what Costs are already capitalized under taxpayer s full absorption do not really address how this should be 471 Costs may include some of these Costs .

9 ApproachesAtbtli-Account-by-account analysis-Department analysis13 Step 2 Additional Sect. 263a Indirect Production Costs Indirect labor Officer s compensation Depletion Rentp Pension and other related Costs Employee benefits Indirect materials Taxes (other than income) Insurance Utilities Indirect materials Purchasing Costs Handling Costs Utilities Repairs and maintenance Engineering and design (S t 174t ) Storage Costs cost recovery Quality control(non-Sect. 174 Costs ) Spoilage Tools and equipmenty Interest (only if Sect. 263a (f) applies) Bidding Costs (successful bids) Licensing and franchise Costs Capitalizable service costs14 Bidding Costs (successful bids)pStep 2 Costs Not Capitalized Selling and distribution Costs Sect 174 Costs Income taxes Strike Costs Warranty costsSect.

10 174 Costs Sect. 179 expenses Sect. 165 losses Ctfidl Warranty Costs On-site storage Costs at retail store facility Uflbid cost recovery of idle assets Unsuccessful bids Deductible service Costs (see next slide)15 Step 2 Deductible Service Costs Overall management or Insurance or risk gpolicy-setting Strategic business planning General financial accountingmanagement policy Environmental management policyGeneral financial accounting General financial planning and management Personnel policygpy General economic analysis and forecasting Internal audit Personnel policy Quality control policy Safety engineering policyInternal audit Shareholder, public and industrial relations Tax services Ta x services Marketing.