Form 1125-A (Rev. 11-2018)
Page 2
Specific Instructions
Line 1. Inventory at Beginning of
Year
If you are changing your method of
accounting for the current tax year, you
must refigure last year's closing inventory
using the new method of accounting. Enter
the result on line 1. If there is a difference
between last year's closing inventory and
the refigured amount, attach an
explanation and take it into account when
figuring any section 481(a) adjustment.
Line 2. Purchases
Reduce purchases by items withdrawn for
personal use. For a partnership, the cost of
these items should be shown on Schedule
K and Schedule K-1 as distributions to
partners.
Line 4. Additional Section 263A
Costs
If you elected a simplified method of
accounting, enter on line 4 the balance of
section 263A costs paid or incurred during
the tax year not includible on lines 2, 3, and
5.
If you elected the simplified production
method, additional section 263A costs are
generally those costs, other than interest,
that were not capitalized under your
method of accounting immediately prior to
the effective date of section 263A, but are
now required to be capitalized under
section 263A. For details, see Regulations
section 1.263A-2(b).
If you elected the simplified resale
method, additional section 263A costs are
generally those costs incurred with respect
to the following categories.
• Off-site storage or warehousing.
• Purchasing.
• Handling, such as processing,
assembling, repackaging, and transporting.
• General and administrative costs (mixed
service costs).
Line 5. Other Costs
Enter on line 5 any costs paid or incurred
during the tax year not entered on lines 2
through 4. Attach a statement listing details
of the costs.
Special Rules for Cooperatives
Cooperatives are allowed to deduct certain
per-unit retain allocations. Include these
costs on line 5. Attach a statement listing
details of per-unit retain allocations paid in:
• Qualified per-unit retain certificates,
• Money or other property (except
nonqualified per-unit certificates), and
• Nonqualified per-unit retain certificates
redeemed this year.
Per-unit retain allocations. A cooperative
is allowed to deduct from its taxable
income amounts paid during the payment
period for the tax year as per-unit retain
allocations to the extent paid in money,
qualified per-unit retain certificates, or
other property with respect to marketing
occurring during the tax year. A per-unit
retain allocation is any allocation from a
cooperative to a patron for products
marketed for him without reference to the
cooperative net earnings. A qualified per-
unit retain certificate is any per-unit retain
certificate that the distributee has agreed
to take into account at its stated dollar
amount.
Nonqualified per-unit retain certificates
redeemed this year. Include the amount
paid in money or other property (except
amounts already included as per-unit retain
certificates) to patrons to redeem
nonqualified per-unit retain certificates. No
deduction is allowed at the time of
issuance for a nonqualified per-unit retain
certificate. However, the cooperative may
take a deduction in the year the certificate
is redeemed, subject to the stated dollar
amount of the certificate. See section 1383.
Also see the instructions for Form 1120-C,
line 30h, for a special rule for figuring the
cooperative's tax in the year of redemption
of a nonqualified per-unit retain certificate.
Line 7. Inventory at End of Year
See Regulations sections 1.263A-1 through
1.263A-3 for details on figuring the amount
of additional section 263A costs to be
included in ending inventory.
Line 8. Cost of Goods Sold
Enter the amount from line 8 on your tax
return as follows. Filers of Form 1120,
1120-C, 1120S, and 1065, enter cost of
goods sold on page 1, line 2. Filers of Form
1120-F, enter cost of goods sold on
Section II, line 2.
Lines 9a Through 9f. Inventory
Valuation Methods
Inventories can be valued at:
• Cost,
• Cost or market value (whichever is lower),
or
• Any other method approved by the IRS
that conforms to the requirements of the
applicable regulations cited below.
Filers that use erroneous valuation
methods must change to a method
permitted for federal income tax purposes.
Use Form 3115 to make this change. See
the Instructions for Form 3115. Also see
Pub. 538.
Line 9a. Method of valuing closing
inventory. On line 9a, check the method(s)
used for valuing inventories. Under lower of
cost or market, the term “market” (for
normal goods) means the current bid price
prevailing on the inventory valuation date
for the particular merchandise in the
volume usually purchased by the filer. For a
manufacturer, market applies to the basic
elements of cost—raw materials, labor, and
burden. If section 263A applies, the basic
elements of cost must reflect the current
bid price of all direct costs and all indirect
costs properly allocable to goods on hand
at the inventory date.
Inventory may be valued below cost
when the merchandise is unsalable at
normal prices or unusable in the normal
way because the goods are subnormal due
to damage, imperfections, shopwear,
change of style, odd or broken lots, or
other similar causes, including second-
hand goods taken in exchange. The goods
may be valued at the bona fide selling
price, minus the direct cost of disposition
(but not less than scrap value). Bona fide
selling price means actual offering of
goods during a period ending not later than
30 days after inventory date.
Lines 9c and 9d. LIFO method. If this is
the first year the Last-in, First-out (LIFO)
inventory method was either adopted or
extended to inventory goods not previously
valued under the LIFO method provided in
section 472, attach Form 970, Application
To Use LIFO Inventory Method, or a
statement with the information required by
Form 970. Check the LIFO box on line 9c.
On line 9d, enter the amount of total
closing inventories computed under
section 472. Estimates are acceptable.
If you changed or extended your
inventory method to LIFO and had to write
up the opening inventory to cost in the year
of election, report the effect of the write-up
as other income, on your applicable return,
proportionately over a 3-year period that
begins with the year of the LIFO election.