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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations
underlying this provision were to provide small business taxpayers with simplification, and the definition of used or consumed for producers in proposed 1.4711b4i does not result in simplification.
The Treasury Department and IRS
decline to change the definition of used or consumed for a producer in these final regulations. As discussed previously, the Treasury Department and the IRS interpret section 471c1Bi as generally codifying the administrative guidance existing at the time of enactment of TCJA that is, Revenue Procedure 200110 and Revenue Procedure 200228 and making it applicable to significantly more taxpayers, in addition to the other benefits discussed in section 3.A of this Summary of Comments and Explanation of Revisions. The commenters recommendation that the term used or consumed for a producer should be treated as occurring when the raw material is used or consumed in the taxpayers production process would allow a producer to recover production costs earlier than was previously allowed under the administrative guidance of Revenue Procedure 200110
and Revenue Procedure 200228.
Additionally, the commenters recommendation suggests that the term used or consumed should be interpreted literally by looking to actual use or consumption by the taxpayer.
However, under such an interpretation a reseller, unlike a producer, would not be able to recover any inventory costs as a reseller does not acquire raw materials for use in a production process nor does it use or consume finished inventory;
rather a reseller acquires and resells finished inventory, unchanged, to customers. The Treasury Department and the IRS have determined that the statute and legislative history do not support a reading of the provision that would provide such a disparity in the recovery of inventory costs between producers and resellers.
In addition, the commenters argument interprets the words inventory treated as non-incidental materials and supplies to mean that the components used to produce the finished goods inventory, rather than the finished goods inventory itself, are treated as materials and supplies. The interpretation advocated by the commenter would result in producers being permitted to recover the cost inputs of their units of inventory in the same manner as they recover the costs of their materials and supplies that is, when the cost input is used or consumed in producing the unit of inventory. The Treasury Department
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and the IRS do not believe Congress intended to break down the traditional definition of the word inventory, particularly since that position benefits only a certain group of taxpayers producers. The Treasury Department and the IRS determined that the definition for used or consumed should provide an equitable rule for the timing of the recovery of the inventory between producers and resellers. Accordingly, these final regulations adopt the proposed regulations without change.
ii. De Minimis Safe Harbor Under 1.263a1f Several comments were received regarding the applicability of the de minimis safe harbor under 1.263a 1f de minimis safe harbor to inventory treated as non-incidental materials and supplies. The commenters assert that the final regulations should permit a taxpayer that uses the section 471c NIMS inventory method to use the de minimis safe harbor for its inventory treated as non-incidental materials and supplies. The commenters point to footnote 465 of the Bluebook, which described the law, both before and after TCJA, as generally permitting deduction of the cost of non-incidental materials and supplies in the taxable year in which they are first used or are consumed in the taxpayers operations in accordance with 1.1623a1.
Furthermore, under 1.1623a1, a taxpayer may also be able to elect to deduct such non-incidental materials and supplies in the taxable year the amount is paid under the de minimis safe harbor election under 1.263a 1f. General Explanation of Public Law 11597, at 113 fn. 465.
The Treasury Department and the IRS
were aware of footnote 465 in the Bluebook when drafting the proposed regulations, but have a different understanding of the rule for inventory treated as non-incidental materials and supplies under Section 471c1Bi as explained in section 3.A.i of this Summary of Comments and Explanation of Revisions. The Treasury Department and the IRS interpret section 471c1Bi as generally codifying the administrative procedures that established the non-incidental materials and supplies method for inventoriable items, and prior pronouncements of 1.1623 and 1.263a1f that these regulations do not apply to inventory property, including inventory property treated as non-incidental materials and supplies. See, e.g., Tangible Property RegulationsFrequently Asked Questions, available at https
www.irs.gov/businesses/small-

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businesses-self-employed/tangibleproperty-final-regulationsAdeminimis.
A commenter states that the de minimis safe harbor was created after Revenue Procedure 200110 and Revenue Procedure 200228 were released, and therefore, did not address the issue of the applicability of the de minimis safe harbor. The Treasury Department and the IRS agree with the timeline described by the commenter.
However, as discussed in the immediately preceding paragraph, the IRS position on the de minimis safe harbor has been addressed in a prior pronouncement. As described previously in section 3.A of this Summary of Comments and Explanation of Revisions, inventory treated as nonincidental materials and supplies retains its character as inventory property. The de minimis safe harbor, which is a regulatory election rather than a statutory one, does not apply to inventory. Section 1.263a1f2i.
Finally, the Treasury Department and the IRS note that for amounts paid to qualify for the de minimis safe harbor, the amounts must have been expensed on the taxpayers applicable financial statement or books and records, as applicable. Sections 1.263a 1f1iB and iiB. This applicable financial statement or books and records expensing requirement under 1.263a1f would be an impediment to the application of the de minimis safe harbor under the section 471c NIMS
inventory method for taxpayers who maintain records of their inventory in their applicable financial statement or books and records, even if the section 471c NIMS inventory method permitted the use of the de minimis safe harbor method. In addition, there is no need for the separate de minimis safe harbor because small business taxpayers may use the inventory method provided in section 471c1B which generally provides that a taxpayer who expenses inventory costs in its applicable financial statement or books and records may generally expense that cost for Federal income tax purposes. For example, a small business taxpayer that expenses the cost of freight-in in its books and records and wants to expense the item for Federal income tax purposes may generally do so using the non-AFS section 471c inventory method, as permitted by section 471c1Bii and discussed later in section 3.C.ii of this Summary of Comments and Explanation of Revisions.
iii. Direct Labor Proposed 1.4711b4ii provides that inventory costs includible in the
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