IRS Will Not Impose The Simplified Production Method On Restaurants

In an IRS chief counsel advice memorandum released Sept. 26 (CCA 201439001), the IRS concluded that it generally would not support imposing the simplified production method on restaurants if the taxpayers are willing to develop and implement a reasonable facts-and-circumstances method instead. If those taxpayers use the simplified production method, the IRS also would support allowing them to treat direct production costs as Section 471 costs, rather than as additional Section 263A costs.

Restaurants generally purchase, process and combine ingredients to produce food for sale to customers. Generally, the IRS views this process as production subject to Section 263A. The CCA explains that a number of restaurants under examination have ending inventories that consist mainly of raw materials, specifically ingredients. The restaurants generally capitalize costs related to the kitchen as production costs and treat costs related to the serving area as non-capitalizable under