| (6) Depreciation, depletion, and amortization. A taxable
entity may include in its cost of goods sold calculation depreciation,
depletion, and amortization reported on the federal income tax return
on which the report under this chapter is based, to the extent associated
with and necessary for the production of goods, including recovery
described by Internal Revenue Code, §197, and property described
in Internal Revenue Code, §179.
(7) Rentals and leases. A taxable entity may include
in its cost of goods sold calculation the cost of renting or leasing
equipment, facilities, or real property directly used for the production
of the goods, including pollution control equipment and intangible
drilling and dry hole costs.
(8) Repair and maintenance. A taxable entity may include
in its cost of goods sold calculation the cost of repairing and maintaining
equipment, facilities, or real property directly used for the production
of the goods, including pollution control devices.
(9) Research and development. A taxable entity may
include in its cost of goods sold calculation the costs attributable
to research, experimental, engineering, and design activities directly
related to the production of the goods, including all research or
experimental expenditures described by Internal Revenue Code, §174,
regardless of whether the taxable entity is the producer of the good
it sells.
(10) Mineral production. A taxable entity may include
in its cost of goods sold calculation geological and geophysical costs
incurred to identify and locate property that has the potential to
produce minerals.
(11) Taxes. A taxable entity may include in its cost
of goods sold calculation taxes paid in relation to acquiring or producing
any material, including property taxes paid on buildings and equipment,
and taxes paid in relation to services that are a direct cost of production.
(12) Electricity. A taxable entity may include in its
cost of goods sold calculation the cost of producing or acquiring
electricity sold.
(13) A taxable entity may include in its cost of goods
sold calculation a contribution to a partnership in which the taxable
entity owns an interest that is used to fund activities, the costs
of which would otherwise be treated as cost of goods sold of the partnership,
but only to the extent that those costs are related to goods distributed
to the contributing taxable entity as goods-in-kind in the ordinary
course of production activities rather than being sold by the partnership.
(e) Additional costs. In addition to the amounts includable
under subsection (d) of this section, the cost of goods sold includes
the following costs in relation to the taxable entity's goods:
(1) deterioration of the goods;
(2) obsolescence of the goods;
(3) spoilage and abandonment, including the costs of
rework, reclamation, and scrap;
(4) if the property is held for future production,
preproduction direct costs allocable to the property, including storage
and handling costs, as provided by subsection (d)(4) and (5) of this
section;
(5) postproduction direct costs allocable to the property,
including storage and handling costs, as provided by subsection (d)(4)
and (5) of this section;
(6) the cost of insurance on a plant or a facility,
machinery, equipment, or materials directly used in the production
of the goods;
(7) the cost of insurance on the produced goods;
(8) the cost of utilities, including electricity, gas,
and water, directly used in the production of the goods;
(9) the costs of quality control, including replacement
of defective components pursuant to standard warranty policies, inspection
directly allocable to the production of the goods, and repairs and
maintenance of goods; and
(10) licensing or franchise costs, including fees incurred
in securing the contractual right to use a trademark, corporate plan,
manufacturing procedure, special recipe, or other similar right directly
associated with the goods produced.
(f) Indirect or administrative overhead costs. A taxable
entity may subtract as a cost of goods sold service costs, as defined
in subsection (b)(9) of this section, that it can demonstrate are
reasonably allocable to the acquisition or production of goods. The
amount subtracted may not exceed 4.0% of total indirect and administrative
overhead costs.
(1) Any costs already subtracted under subsections
(d) or (e) of this section may not be subtracted under this subsection.
(2) Any costs excluded under subsection (g) of this
section may not be subtracted under this subsection.
(g) Costs not included. The cost of goods sold does
not include the following costs in relation to the taxable entity's
goods:
(1) the cost of renting or leasing equipment, facilities,
or real property that is not used for the production of the goods;
(2) selling costs, including employee expenses related
to sales;
(3) distribution costs, including outbound transportation
costs;
(4) advertising costs;
(5) idle facility expenses;
(6) rehandling costs;
(7) bidding costs, which are the costs incurred in
the solicitation of contracts ultimately awarded to the taxable entity;
(8) unsuccessful bidding costs, which are the costs
incurred in the solicitation of contracts not awarded to the taxable
entity;
(9) interest, including interest on debt incurred or
continued during the production period to finance the production of
the goods;
(10) income taxes, including local, state, federal,
and foreign income taxes, and franchise taxes that are assessed on
the taxable entity based on income;
(11) strike expenses, including costs associated with
hiring employees to replace striking personnel, but not including
the wages of the replacement personnel, costs of security, and legal
fees associated with settling strikes;
(12) officers' compensation;
(13) costs of operation of a facility that is:
(A) located on property owned or leased by the federal
government; and
(B) managed or operated primarily to house members
of the armed forces of the United States;
(14) any compensation paid to an undocumented worker
used for the production of goods, provided that, as used in this paragraph
only, the following terms shall have the following meanings:
(A) "undocumented worker" means a person who is not
lawfully entitled to be present and employed in the United States;
and
(B) "goods" includes the husbandry of animals, the
growing and harvesting of crops, and the severance of timber from
realty; and
(15) costs funded by a partnership contribution, to
the extent that the contributing taxable entity made the cost of goods
sold deduction under subsection (d)(13) of this section.
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