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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations
businesses. The regulations provide clarity and certainty for small business taxpayers implementing the exemptions.
As described in more detail earlier in the preamble, the Treasury Department and the IRS considered a number of alternatives under the final regulations.
For example, in providing rules related to inventory exemption in section 471c1Bi, which permits the taxpayer to treat its inventory as nonincidental materials and supplies, the Treasury Department and the IRS
considered whether inventoriable costs should be recovered by i using an approach similar to the approach set forth under Revenue Procedure 200110
20012 IRB 272 and Revenue Procedure 200228 200228 IRB 815, which provided that inventory treated as non-incidental materials and supplies was used and consumed, and thus recovered through costs of goods sold by a cash basis taxpayer, when the inventory items were provided to a customer, or when the taxpayer paid for the items, whichever was later, or ii using an alternative approach that treated inventory as used and consumed and thus recovered through costs of goods sold by the taxpayer, in a taxable year prior to the year in which the inventory item is provided to the customer for example, in the taxable year in which an inventory item is acquired or produced. The alternative approach described in ii would produce a savings equal the amount of the cost recovery multiplied by an applicable discount rate determined based on the number of years the cost of goods sold recovery would be accelerated under this alternative. The Treasury Department and the IRS
interpret section 471c1Bi and its legislative history generally as codifying the rules provided in the administrative guidance existing at the time TCJA was enacted. Based on this interpretation, the Treasury Department and the IRS
have determined that section 471c materials and supplies are used and consumed in the taxable year the taxpayer provides the goods to a customer, and are recovered through costs of goods sold in that year or the taxable year in which the cost of the goods is paid or incurred in accordance with the taxpayers method of accounting, whichever is later. The Treasury Department and the IRS do not believe this approach creates or imposes undue burdens on taxpayers.
III. Section 7805f Pursuant to section 7805f of the Code, the notice of proposed rulemaking preceding this Treasury Decision was
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submitted to the Chief Counsel of the Office of Advocacy of the Small Business Administration for comment on its impact on small business.
IV. Executive Order 13132: Federalism Executive Order 13132 entitled Federalism prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on state and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. This final rule does not have federalism implications and does not impose substantial, direct compliance costs on state and local governments or preempt state law within the meaning of the Executive Order.
Drafting Information The principal author of these regulations is Anna Gleysteen, IRS
Office of the Associate Chief Counsel Income Tax and Accounting. However, other personnel from the Treasury Department and the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows:
PART 1INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805

Par. 2. Section 1.263A0 is amended by:
1. Revising the entry in the table of contents for 1.263A1b1.
2. Redesignating the entries in the table of contents for 1.263A1j, k, and l as the entries for 1.263A1k, l, and m.
3. Adding a new entry in the table of contents for 1.263A1j.
4. Revising the newly designated entries for 1.263A1k, l, and adding an entry for m6.
5. Revising the entries in the table of contents for 1.263A3a2ii.
6. Adding entries for 1.263A3a5
and revising the entry for 1.263A3b.
7. Redesignating the entries in the table of contents for 1.263A4a3
and 4 as the entries for 1.263A
4a4 and 5.
8. Adding in the table of contents a new entry for 1.263A4a3.

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9. Revising the entry in the table of contents for 1.263A4d introductory text.
10. Redesignating the entry in the table of contents for 1.263A4d5 as the entry for 1.263A4d7.
11. Adding in the table of contents a new entry for 1.263A4d5.
12. Adding an entry in the table of contents for 1.263A4d6.
13. Adding an entry in the table of contents for 1.263A4e5.
14. Revising the entry in the table of contents for 1.263A4f introductory text.
15. Adding an entry in the table of contents for 1.263A4g.
16. Revising the entry in the table of contents for 1.263A7a4.
The revisions and additions read as follows:

1.263A0 Outline of regulations under section 263A.

1.263A1

Uniform Capitalization of Costs.

b
1 Small business taxpayers.

j Exemption for certain small business taxpayers.
1 In general.
2 Application of the section 448c gross receipts test.
i In general.
ii Gross receipts of individuals, etc.
iii Partners and S corporation shareholders.
iv Examples.
A Example 1
B Example 2
3 Change in method of accounting.
i In general.
ii Prior section 263A method change.
k Special rules 1 Costs provided by a related person.
i In general ii Exceptions 2 Optional capitalization of period costs.
i In general.
ii Period costs eligible for capitalization.
3 Trade or business application 4 Transfers with a principal purpose of tax avoidance. Reserved l Change in method of accounting.
1 In general.
2 Scope limitations.
3 Audit protection.
4 Section 481a adjustment.
5 Time for requesting change.
m
6 Exemption for certain small business taxpayers.
1.263A3 Rules Relating to Property Acquired for Resale.
a
2
ii Exemption for small business taxpayers.

5 De minimis production activities.

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