In 2010, Benson retail had $300,000 in offsite warehousing costs, incurred $150,000 in their purchasing department, and $45,000 in advertising and marketing. Benson has determined that general and administrative (G and A) expenses allocable to the purchasing department were $75,000. Purchase during 2010 were $5 million and ending inventory calculated in accordance with sec. 471 was $1.2 million.
In 2011, Benson had $250,000 in warehousing costs, $100,000 in purchasing, $50,000 in advertising and marketing and $50,000 in G&A allocable to purchasing. Purchases were $4.5 million during 2011 and ending inventory is $1 million.
You have determined that, due to Benson's past 3 years of gross receipts, it now subject Sec. 263A capitalization rules for 2011.
1) Compute Benson's Sec. 481 adjustment as a result of implementing this requirement. Assume that Benson elects to use the simplified resale method for purposes of allocating additional Sec. 263A costs to ending inventory.
2) What is Benson's ending inventory for tax purposes for 2011 as result of this change?
3) What is the adjustment to taxable income for 2011 as a result of this change (include both the Sec 481 adjustment and the current year's adjustment)?
4) Comment on whether or not permission is required to effect this change.