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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations
paragraph b6ii of this section nonAFS section 471c inventory method.
4 Inventory treated as nonincidental materials and suppliesi In general. The costs of inventory treated as non-incidental materials and supplies are recovered through cost of goods sold only in the taxable year in which the inventory is used or consumed in the taxpayers business, or in the taxable year in which the taxpayer pays for or incurs the cost of the inventory, whichever is later. Inventory treated as non-incidental materials and supplies is used or consumed in the taxpayers business in the taxable year in which the taxpayer provides the inventory to its customer. The costs of inventory are treated as non-incidental materials and supplies under this paragraph b4 are not eligible for the de minimis safe harbor election under 1.263a1f2.
ii Identification and valuation of inventory treated as non-incidental materials and supplies. A taxpayer may determine the amount of the costs of its inventory treated as non-incidental materials and supplies that are recoverable through costs of goods sold by using either a specific identification method, a first-in, first-out FIFO
method, or an average cost method, provided that method is used consistently. See 1.4712d. A
taxpayer that uses the section 471c NIMS inventory method may not use any other method described in the regulations under section 471, or the last-in, first-out LIFO method described in section 472 and the accompanying regulations, to either identify inventory treated as nonincidental materials and supplies, or to value that inventory treated as nonincidental materials and supplies. The inventory costs includible in the section 471c NIMS inventory method are the direct material costs of the property produced or the costs of property acquired for resale. However, an inventory cost does not include a cost for which a deduction would be disallowed, or that is not otherwise recoverable but for paragraph b4 of this section, in whole or in part, under a provision of the Internal Revenue Code.
iii Allocation methods. A taxpayer treating its inventory as non-incidental materials and supplies under this paragraph b4 may allocate the costs of such inventory by using specific identification or any other reasonable method.
iv Example. Taxpayer D is a baker that reports its baking trade or business on Schedule C, Profit or Loss From Business, of the Form 1040, Individual Tax Return, and Ds baking business has
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average annual gross receipts for the 3taxable years prior to 2019 of less than $100,000. D meets the gross receipts test of section 448c and is not prohibited from using the cash method under section 448a3 in 2019. Therefore, D
qualifies as a small business taxpayer under paragraph b2 of this section. D
uses the overall cash method, and the section 471c NIMS inventory method.
D purchases $50 of peanut butter in November 2019. In December 2019, D
uses all of the peanut butter to bake cookies available for immediate sale. D
sells those peanut butter cookies to customers in January 2020. The peanut butter cookies are used or consumed under paragraph b4i of this section in January 2020 when the cookies are sold to customers, and D may recover the cost of the peanut butter in 2020.
5 AFS section 471c inventory methodi In general. A taxpayer that meets the gross receipts test described in paragraph b2 of this section and that has an AFS for such taxable year may use the AFS section 471c inventory method described in this paragraph to account for its inventory costs for the taxable year. For purposes of the AFS section 471c inventory method, an inventory cost is a cost of production or resale that a taxpayer capitalizes to inventory property produced or property acquired for resale in its AFS. For purposes of the AFS
section 471c inventory method, costs that are generally required to be capitalized to inventory under section 471a but that the taxpayer does not capitalize to inventory on its AFS are not required to be capitalized to inventory. However, an inventory cost does not include a cost that is neither deductible nor otherwise recoverable but for paragraph b5 of this section, in whole or in part, under a provision of the Internal Revenue Code for example, section 162c, e, f, g, or 274. In lieu of the inventory method described in section 471a, a taxpayer using the AFS section 471c inventory method recovers its inventory costs in accordance with the inventory method used in its AFS.
ii Definition of Applicable Financial Statement AFS. The term applicable financial statement AFS is defined in section 451b3 and the accompanying regulations. See 1.4513a5. The rules relating to additional AFS issues provided in 1.4513h apply to the AFS section 471c inventory method. In the case of a taxpayer with a financial accounting year that differs from the taxpayers taxable year, the taxpayer must consistently use the same method of accounting described in 1.451
3h4iA through C that is used for
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section 451b purposes to also determine its inventory for the taxable year under this paragraph b5ii. A
taxpayer has an AFS for the taxable year if all of the taxpayers taxable year is covered by an AFS.
iii Timing of inventory costs.
Notwithstanding the timing rules used in the taxpayers AFS, the amount of any inventoriable cost may not be capitalized or otherwise taken into account for Federal income tax purposes any earlier than the taxable year during which the amount is paid or incurred under the taxpayers overall method of accounting, as described in 1.446
1c1. For example, in the case of an accrual method taxpayer, inventoriable costs must satisfy the all events test, including economic performance, of section 461. See 1.4461c1ii and section 461 and the accompanying regulations.
iv Example. H is a calendar year C
corporation that is engaged in the trade or business of selling office supplies and providing copier repair services. H
meets the gross receipts test of section 448c and is not prohibited from using the cash method under section 448a3
for 2019 or 2020. For Federal income tax purposes, H chooses to account for purchases and sales of inventory using an accrual method of accounting and for all other items using the cash method.
For AFS purposes, H uses an overall accrual method of accounting. H uses the AFS section 471c inventory method of accounting. In Hs 2019 AFS, H incurred $2 million in purchases of office supplies held for resale and recovered the $2 million as cost of goods sold. On January 5, 2020, H
makes payment on $1.5 million of these office supplies. For purposes of the AFS
section 471c inventory method of accounting, H can recover the $2
million of office supplies in 2019
because the amount has been included in cost of goods sold in its AFS
inventory method and section 461 has been satisfied.
6 Non-AFS section 471c inventory methodi In general. A taxpayer that meets the gross receipts test described in paragraph b2 of this section for a taxable year and that does not have an AFS, as defined in paragraph b5ii of this section, for such taxable year may use the non-AFS section 471c inventory method to account for its inventories for the taxable year in accordance with this paragraph b6.
The non-AFS section 471c inventory method is the method of accounting used for inventory in the taxpayers books and records that properly reflect its business activities for non-tax purposes and are prepared in
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