Tax treatment of ISO 9000 costs.

A recent IRS ruling clarifies the tax treatment for costs of obtaining, maintaining and renewing International Organization for Standardization (ISO) 9000 certification. Rev. Rul. 2000-4 generally permits the current deduction of ISO 9000-related costs with limited exceptions when specific assets are created. This ruling should be particularly helpful to taxpayers and their tax advisers in an environment in which customer expectations in the global marketplace are making ISO 9000 certification increasingly important for U.S. taxpayers doing business internationally. Further, the ruling presents a helpful guide in analyzing other issues that could arguably be expensed or capitalized.

The ISO developed the ISO 9000 series of standards to ensure that organizations implement and continue to adhere to specific requirements concerning their quality management and quality assurance systems. ISO 9000 certification provides customers with an objective standard in evaluating suppliers of goods and services.

Organizations typically incur internal and external costs to currently assess the quality process in place, create a quality manual, educate employees, implement a new quality system and obtain formal certification from an independent auditor. Subsequent to initial certification, ISO 9000 costs include periodic audits to maintain a certified status and to renew certification on expiration.

Prior to Rev. Rul. 2000-4, there was no specific authority on the tax treatment of ISO 9000-related costs. However, in the current post-INDOPCO environment, the possibility of capitalization of these costs on audit would not seem unlikely. Rev. Rul. 2000-4 provides specific guidance in this instance by analyzing and applying the relevant authority to ISO 9000-related costs.

Citing INDOPCO, Inc., 503 US 79 (1992), Rev. Rul. 2000-4 explains that Secs. 162, 263 and 263A are intended to match expenses with revenues generated by those expenses. It is not enough to say that an expenditure has a future benefit and, thus, must be capitalized. Again citing INDOPCO, the ruling explains that the mere presence of an incidental future benefit may not warrant capitalization; not only the duration, but the extent, of the benefit must be considered. Holding that the ISO 9000-related costs are more like "training" and "advertising" than obtaining licenses, stock trading privileges, state bar certifications and similar market-entry requirements, the ruling concludes that any future benefit is merely incidental rather than significant, and, therefore, the costs need not be capitalized. The only exception relates to the portion of ISO 9000-related costs that result in creating or acquiring a physical asset (such as a quality manual), which must be capitalized appropriately.

Sec. 263A extends Sec. 263's reach by requiring capitalization of certain otherwise currently deductible direct and indirect costs, because they are allocable to real or tangible personal property. Citing Sec. 263A (which generally exempts quality-control expenditures from uniform capitalization), the ruling further holds that ISO 9000-related costs are also exempt.

Taxpayers currently capitalizing ISO 9000-related costs, who want to change to the method described in Rev. Rul. 2000-4, must generally follow the automatic change procedures outlined in Rev. Proc. 99-49. Special rules apply to taxpayers under examination before an Appeals office or a Federal court; however, Section 4.02 of Rev. Proc. 99-49 does not apply.

FROM SCOT P. ROCHE, ROCKFORD, IL