United States » Laws and Regulations » Tax Info for the Manufacturing Industry Business Types Part-II

Tax Info for the Manufacturing Industry Business Types Part-II

Laws and Regulations

What To Do When You Disagree
If your notice or letter is listed above, follow the link for advice on handling disagreements with the notice. In general though, you need to contact IRS at the contact number provided on the notice to explain why you disagree. If that doesn't result in your satisfaction, the Taxpayer Advocate may be able to assist.

Tax Laws and Regulations - Manufacturing
This page provides links to recent revenue rulings and court cases, legal determination of business use of the home and other regulations for the small business.

Accounting Methods
The following is a partial list of issues solicited from Internal Revenue Agents on accounting method changes identified during examinations. This is posted for informational purposes only and does not represent any official position of the Internal Revenue Service.

Improper adjustment period:
Taxpayer has changed its method of accounting for depreciation, which resulted in a negative adjustment (in the taxpayer's favor). Taxpayer has taken this negative adjustment into account in the year 19x1. No form 3115 was filed requesting an accounting method change.

Updated Analysis: Revenue Procedure 2002-09 modified by RP 2002-19 and 2004-11 for years 2001 and subsequent: When Form 3115 is filed an automatic consent is granted. This is available if not enough or too much depreciation was claimed by using an improper method of depreciation; compliance with section 2 of the appendix necessary; one-year reporting of taxpayer favorable section 481(a) and four-year reporting of Service favorable section 481(a) adjustment.

Erroneous method becomes an accounting method:
For unknown reason, taxpayer's internal system writes up the cost of used cars (inventory) by $100. The taxpayer has done this for more than two years. Now in year 199X the taxpayer wishes to restate its inventory balance to the correct amounts and makes a large adjusting entry reducing taxable income for the amount. No form 3115 requesting an accounting method change.

According to the analysis in Revenue Ruling 90-38, 1990-1, CB 57 the "treatment of a material item in the same way in determining the gross income or deductions in two or more consecutively filed tax returns represents consistent treatment of that item for purposes of section 1.446-1(e)(2)(ii)(a) of the regulations." A scenario similar to this represents the use of an erroneous accounting method. Any change would require the filing of Form 3115 and an adjustment period of 4 years, rather than 1 year.

The filing of an amended return to change an accounting method:
Taxpayer elected to use the accrual method on its initial return filing in year 19X1. In 19X3, the taxpayer decided that the use of the cash method might be more favorable.

The use of a proper method of accounting on its first return established the method of accounting. The taxpayer, therefore, is bound by its initial election. See generally in section 1.446-1(e)(1) of the regulations and Revenue Ruling 90-38, 1990-1, CB 57

Environmental Cleanup

Revenue Ruling 94-38 - Environmental Cleanup Cost of Land
Costs incurred to clean up land and to treat groundwater that a taxpayer contaminated with hazardous waste from its business are deductible by the taxpayer as ordinary and necessary business expenses under section 162 of the Code. Costs properly allocable to constructing groundwater treatment facilities are capital expenditures under section 263. Revenue Ruling 88-57 modified.

Environmental Cleanup Rev Ruling 2000-7


Mountain State Ford Truck Sales, Inc., 112 T.C. No. 7, March 2, 1999
LIFO - Replacement Costs

  • For LIFO inventory purposes, taxpayers must use actual cost and not replacement cost
  • The use of replacement cost does not clearly reflect income
  • The IRS did not abuse its discretion by adding the taxpayer's LIFO reserve back to income since the taxpayer failed to keep adequate records to compute LIFO using any other method

Update: Automotive Alert (from Automotive section) on Revenue Procedure 2002-17
On March 11, 2002, the IRS released the long anticipated resolution to the replacement cost LIFO issue. Revenue Procedure 2002-17 describes a safe harbor method of accounting for vehicle parts inventory that allows automobile dealers to approximate the cost of their parts. The revenue procedure includes procedures for dealers to receive automatic consent to change to the replacement cost method.

Thor Power Tool Co. v. Commissioner, 439 U.S. 522 (1979), 1979-1 C.B. 167
Lower of Cost or Market Method Ruling:
The taxpayer, who used the "lower of cost or market" method of valuing inventories, wrote down what it regarded as "excess" inventory to its net realizable value, which in most cases was determined to be scrap value. The taxpayer determined that this inventory, mostly spare parts, was "excess" inventory because it was held in excess of any reasonably foreseeable future demand, although this inventory was not scrapped or sold at reduced prices. The taxpayer physically retained the excess items in inventory and continued to sell them at original prices. The Supreme Court, in disallowing the taxpayer's write-down, held that because the taxpayer provided no objective evidence of the reduced market of its excess inventory, its write-down was plainly inconsistent with the regulations and was properly disallowed by the Commissioner. The taxpayer could not have properly taken advantage of any permitted write-down because it did not scrap its "excess" inventory nor sell or offer it for sale at prices below market (replacement cost).

IRC Section 471 - General Rule for Inventories
IRC Section 472 - Last In, First Out Inventories
IRC Section 263A - Capitalization and Inclusion in Inventory Costs of Certain Expenses.

Trends and Statistics - Manufacturing

 This site provides industry specific and general survey results that should be of interest to the small business owner.

Bureau of Labor Statistics
The Bureau of Labor Statistics is the principal fact-finding agency for the Federal Government in the broad field of labor economics and statistics.

Census Non-Employer Statistics
Provides periodic statistics that count and profile U.S. businesses with no paid employment and payroll. The United States Code, Titles 13 and 26, authorizes this program.

Office of Women's Business Ownership (OWBO)
Women-owned businesses are increasing in number, range, diversity and earning power. As women business owners expand their companies, they add increasingly to our national economy.

Characteristics of Business Owners Survey
The 1992 Characteristics of Business Owners (CBO) Survey provides the only national data available for comparing selected economic, demographic, and sociological characteristics among minority, women, nonminority male, and all business owners and their businesses.

Statistics about Business Size (including Small Business) from the U.S. Census Bureau
The Census Bureau does not define small or large business, but provides statistics that allow users to define business categories in any of several ways: in terms of employers and nonemployers, employment size of firms, employment size of establishments, receipts size of firms, and legal form of organizations.

Surveys of Minority - and Women-Owned Business Enterprises
These surveys provide valuable economic data on business owners' race, ethnicity, and gender, and are part of the economic census program, which the Census Bureau is required to conduct every 5 years by law (Title 13 of the United States Code).

Related Links - Manufacturing

National Association of Manufacturers (NAM)
NAM's mission is to enhance the competitiveness of manufacturers and improve living standards for working Americans by shaping a legislative and regulatory environment conducive to U.S. economic growth, and to increase understanding among policymakers, the media, and the general public about the importance of manufacturing to America's economic strength.

Graphic Arts Information Network
The Printing Industries of America and the Graphic Arts Technical Foundation serve more than 14,000 member companies, promoting programs, services, and an environment that help them operate their businesses profitably.

American Machine Tool Distributors Association (AMTDA)
Founded in 1925, the AMTDA is a trade association dedicated to providing members with a dynamic array of educational programs, marketing management data and business services necessary to achieve and maintain a competitive advantage in the machine tool distribution industry.

Grocery Manufacturers of America (GMA)
GMA is the world's largest association of food, beverage and consumer product companies. With U.S. sales of more than $460 billion, GMA members employ more than 2.5 million workers in all 50 states. The organization applies legal, scientific and political expertise from its member companies to vital food, nutrition and public policy issues affecting the industry.

Occupational Safety and Health Administration (OSHA)
The mission of OSHA is to save lives, prevent injuries and protect the health of America's workers. To accomplish this, federal and state governments must work in partnership with the more than 100 million working men and women and their six and a half million employers who are covered by the Occupational Safety and Health Act of 1970.

Environmental Protection Agency (EPA)
The mission of the U.S. EPA is to protect human health and to safeguard the natural environment--air, water, and land--upon which life depends.

Social Security Administration (SSA)
The mission of SSA is to promote the economic security of the nation's people which can only be accomplished through fulfillment of our fundamental responsibilities to administer effective programs, provide quality service, ensure program integrity, educate the public, and value and invest in our workforce.

General Small Business Information
This section provides general small business information useful in all industries and professions. It includes links to small business products, employment taxes, electronic filing and paying, taxpayer burden reduction, abusive tax avoidance transactions, and many other topics.

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Tax Info for the Manufacturing Industry Business Types Part-II