Pub. 1 2011 Issue 2

11 Q good news — continued on page 12 These developments pertain to: • The IRS creating two safe harbors with respect to potential thorny issues related to Section 263A inventory overhead capitalization in dealerships • Reduction of the maximum Federal estate and gift tax rate from 55% to 35% and an increase in the Federal estate and gift tax exemption amount to $5,000,000. • Given the potential benefits of both of these developments, I have concluded to address both of them for you below: Section 263A Inventory Overhead Capitalization Safe Harbors The IRS recently issued favorable guidance for auto dealers related to Uniform Capitalization (UNI- CAP) for inventory costs (Revenue Procedure 2010- 44 issued 11-9-10). This guidance helps to end a long dispute over proper capitalization methods and will result in clarification on just how to move forward. Most importantly, this guidance will allow dealers to deduct most costs when incurred and also will elimi- nate the potential audit risks from the IRS related to these capitalization policies. Background - Historically, the IRS required retail- ers and producers to capitalize (not expense) certain direct and indirect costs related to inventory. These costs included direct acquisition costs, indirect pur- chasing costs, storage, and handling costs. These costs were required to be capitalized, however, the IRS did not provide clear guidance for automobile dealers on BY THE NUMBERS BY JAMES EAGAN CPA, PARTNER AND AUTOMOTIVE CONSULTANT, PLANTE & MORAN PLLC from the IRS and U.S. Congress for Auto Dealers In recent conversations, I have noted that many auto dealers are not necessarily aware of two recent developments which provide potential significant tax minimization possibilities.