Texas Changes Rules for Margin Deduction Election and Definition of Includible Costs for COGs
August 14, 2013
By Gary Bingel, CPA
The Texas Comptroller issued Letter No. 201307727L dated July 16, 2013 which explained recent revisions to Rule 3.588 “Margin: Cost of Goods Sold.” The revisions should simplify audits and amended returns of this Cost of Goods Sold (COGS) methodology.
The first change is an entity is allowed to amend its method of computing taxable margin. Previously, the election of the deduction methodology was made with the original return as-filed and locked in that methodology. Under the new position, an amended return can be filed within the four-year statute of limitations to change the as-filed methodology to use the alternative COGS or compensation deduction methodology.
The second change involves the changes to the treatment of labor costs for purposes of the COGS deduction. The change in the definition of “labor costs” and “indirect and administrative overhead costs” will result in the Texas COGS more closely following IRC Section 263A and expanding the deductible COGS labor costs. Some specific changes are:
- Supervisory labor was formerly only allowed as indirect and administrative overhead costs subject to the 4.0% cap. These costs can now be directly attributed to production activities and fully deducted.
- The pool of costs that qualify as benefits expenses have been expanded to follow the taxpayer-favored district court decision of Winstead. Expenses such as job-related education, business use of a company car, out-of-town travel/meal reimbursements, and per diem reimbursements may now be included in the fully deductible COGS deductions when the labor to which the benefits correspond is already includible in COGS.
- A taxable entity may now also deduct for the COGS methodology labor costs even if the costs would be required to be capitalized under IRS Reg. 1.263A-1(e).
The third change within the revised rule includes a new term: “service costs.” If costs can be identified specifically with a service department or function, or directly benefit a service department or function, and are demonstrably allocable to the acquisition or production of goods, they may now be included in the indirect and administrative overhead costs subject to the 4.0% cap.
Finally, property taxes paid on buildings and equipment are now includible in COGS deduction if the assets are used in relation to services that are a direct cost of production.