[Ralphie Dos Nachos]

I’m a little confused on REG here. In Becker Ch.1 they explain costs that are required to be capitalized as “direct materials, direct labor, and applicable indirect costs” which of course makes sense and gives me unfortunate flashbacks to BEC. However, in Ch.3 for basis and holding of assets they say “general rule is that all tangible property that is not inventory must be capitalized”. Well isn’t DM,DL,FOH what make up inventory and is capitalized? so is that not contradicting or am I missing something

[CPAHOPE]

From tax perspective, they use modified cash basis which means they only capitalize long term assets. Cash basis is used for short term assets and liabilities. When you study REG, you need to switch your gear and think like a tax accountant

[AusNat]

Both statements are true – the general rule is that all tangible property that is not inventory is capitalized. Also, inventory is often capitalized, and the capitalized costs of inventory include direct materials, direct labor. You'll see it separated out in the book (and in the code and regs) because the rules governing inventory are different from the rules governing other intangible assets used in business. It's common for smaller businesses to be exempt from capitalizing inventory costs but not from capitalizing other tangible assets. Inventory also produces ordinary income when sold instead of cap gain and isn't depreciable (or subject to depreciation recapture).

[Author]

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