Category: Accounting Periods & Methods
Subject: Cost Accounting
Title: Inventory Treatment of Freight and Transportation Costs
IRC Sections: 471
Filename: 1340.html
Date Produced: 09/94

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Facts/Issues
Taxpayer (TP) owns a furniture store. TP purchases used furniture and resells the furniture. TP also sells some new furniture as well. TP incurs substantial labor costs related to transporting the used furniture to TP's showroom or warehouse. The labor costs can exceed the cost of purchasing the furniture. TP hires day workers and pays them in cash to move the furniture. TP pays this cost separately. TP also incurs freight costs related to shipping the new furniture to the warehouse or showroom. The issue is whether the labor and freight costs must be capitalized in the cost of the furniture inventory.

Discussion
Whether TP is required to use inventories in determination of taxable income is not at issue. The only issue is what cost items must be included in inventory. It is assumed that TP is not subject to the uniform cost capitalization rules of §263A.

Internal Revenue Code §471 provides the requirement that certain taxpayers use inventories in determination of taxable income. In addition, §471 delegates to the Treasury Department the authority to prescribe accounting practices necessary to implement the inventory requirement.

Regulation Section 1.471-2(b) provides that in the case of purchased merchandise, transportation or other necessary charges incurred in acquiring possession of the goods must be capitalized in inventory along with the purchase price of the goods.

The language of the regulation is very broad and clearly requires capitalization of any and all costs necessary to get goods into the taxpayer's possession. It seems to me quite clear that the regulation covers both ordinary freight charges for new furniture purchases as well as the transportation and labor charges with respect to purchases of used furniture. I can see no conceptual justification for excluding labor costs simply because they are large in relation to the purchase price of the actual goods. Irrespective of the relationship of the cost of purchasing goods to the cost of collecting and transporting the goods to the taxpayer's place of business, the labor and transportation costs are unquestionably linked to the acquisition of inventory and must, therefore, be capitalized in the cost of that inventory.