UNICAP for Amazon Brands: Why Prep, Kitting and 3PL Storage Can Belong in Inventory Cost

By Bernardo Campelo, Forbes Business Council E-Commerce Leader, Amazon SPN Certified provider, Amazon SP-API authorized partner, and Founder of PrepVia.

As of October 29, 2026, a brand that sells on Amazon is exempt from the uniform capitalization rules of Section 263A for 2026 only if its average annual gross receipts for the three prior tax years do not exceed $32,000,000. That is the figure the IRS set in Rev. Proc. 2025-32 for "taxable years beginning in 2026." Above that line, the Treasury regulations name cost categories that read close to what a prep center and a 3PL bill every month: processing, assembling, repackaging, transporting and off-site storage. Those costs can belong in the cost of inventory, not in operating expenses.

The rule is not new. The resale section of the regulation, Treas. Reg. 1.263A-3, has not changed its substance since March 2022. What changed for FBA brands is where the cost shows up. Since January 1, 2026, Amazon no longer offers prep and item labeling for FBA shipments in the US store. Work that used to sit inside an Amazon fee now arrives on a third-party invoice or in your own payroll, and December 31, 2026 is the first year-end close with that line fully outside Amazon.

This is a guide to what the regulation says and to the questions it raises for a CFO, a controller and the CPA who signs the return. It is not tax advice. Every classification below is one to confirm with your CPA before December 31, not after.

Every date and name below was checked on October 29, 2026 against the US Code, the eCFR, IRS revenue procedures, forms and instructions, and Amazon's Seller Central help pages, linked where they first appear. The IRS publishes the next year's inflation-adjusted threshold each fall; as of October 29, 2026 the 2027 figure had not been released.

Who Is Inside UNICAP in 2026

Section 263A requires inventory to carry its direct costs and a proper share of the indirect costs allocable to it. The statute says those costs, "in the case of property which is inventory in the hands of the taxpayer, shall be included in inventory costs." It applies to goods you buy to resell, not only to goods you manufacture: Section 263A(b)(2) covers property "acquired by the taxpayer for resale," and the regulation calls that taxpayer a reseller, whether retailer or wholesaler.

The exemption is in Section 263A(i). A taxpayer that meets the gross receipts test of Section 448(c) for a year is outside Section 263A for that year, unless it is a tax shelter. The test looks back. It averages the annual gross receipts of the three taxable years before the year being tested. Gross receipts are total sales "net of returns and allowances," and they "are not reduced by cost of goods sold," which for an Amazon seller points to sales, not the payouts left after fees. For a calendar-year brand testing 2026, that means 2023, 2024 and 2025.

Three details move brands across the line sooner than the headline number suggests:

• Related entities are tested together. Under Section 448(c)(2), all persons treated as a single employer under Sections 52(a) or (b) or 414(m) or (o) are treated as one person. Two brands under common control do not each get their own $32,000,000.
• Individuals add up their businesses. The regulation, Treas. Reg. 1.263A-1(j), gives the example of an individual with two businesses averaging $5 million and $35 million. Together they total $40 million, and neither passes the 2020 test of $26 million.
• A tax shelter has no exemption at any size. For a partnership, an LLC or an S corporation, that can include a year in which more than 35 percent of losses are allocated to limited partners or limited entrepreneurs, the "syndicate" rule in Treas. Reg. 1.448-2. A brand with passive investors and a loss year should put this question to its CPA.

The statute has not moved for resellers. Its only amendment since December 2020, by Public Law 119-21 in July 2025, inserted a reference to Section 174A in the research expenditures exception.

What the Regulation Names: Handling, Storage and Purchasing

A reseller capitalizes the acquisition cost of the goods and the indirect costs properly allocable to them. The regulation says the indirect costs "most often incurred by resellers are purchasing, handling, and storage costs," and it defines each one.

Handling. Treas. Reg. 1.263A-3(c)(4)(i) says handling costs "include costs attributable to processing, assembling, repackaging, transporting, and other similar activities with respect to property acquired for resale," and that they "are generally required to be capitalized." Processing means minor changes to a product, assembling means "incidental activities that are necessary in readying property for resale," and repackaging means "the costs a taxpayer incurs to package property for sale to its customers." The regulation does not mention FBA or FNSKU labels. Whether polybagging, labeling and bundling fit these words is the first question for your CPA, and the plain reading points that way.

Transportation. The same paragraph lists "sorting, tagging, and marking property" and "loading and unloading shipments" as transportation costs. It says those generally capitalized include costs of moving goods "From the vendor to the taxpayer" and "From one of the taxpayer's storage facilities to another of its storage facilities." Inbound freight from the factory or the port is the clearest case. Freight from a 3PL to an Amazon fulfillment center, or from AWD into FBA, looks like the storage-to-storage case. The regulation says "the taxpayer's storage facilities," though, and whether a facility run by a third party counts is a point for the CPA to confirm.

Storage. Under Treas. Reg. 1.263A-3(c)(5), storage costs are generally capitalized when they come from an off-site storage or warehousing facility. They are not when they come from an on-site facility. The definitions are narrow:

• On-site storage facility. "A storage or warehousing facility that is physically attached to, and an integral part of, a retail sales facility."
• Retail sales facility. "A facility where a taxpayer sells merchandise exclusively to retail customers in on-site sales."
• On-site sales. Sales "made to retail customers physically present at a facility." The regulation adds that "mail order and catalog sales are made to customers not physically present at the facility, and thus, are not on-site sales."
• Off-site storage facility. "A storage facility that is not an on-site storage facility."

A 3PL warehouse, an AWD facility and an Amazon fulfillment center are not attached to a store where the buyer walks in. Under these definitions that points to off-site storage. The regulation does not name Amazon or 3PLs, so the reading is ours to make and your CPA's to confirm, but online orders look like the "mail order" sales in the regulation's own example.

The IRS says the same thing in plain words in the instructions for Form 1125-A, the cost of goods sold schedule the form says to attach to Form 1120, 1120-C, 1120-F, 1120S or 1065. For a taxpayer using the simplified resale method, it lists additional section 263A costs as "Off-site storage or warehousing," "Purchasing," "Handling, such as processing, assembling, repackaging, and transporting," and "General and administrative costs (mixed service costs)." Those costs go on line 4, "Additional section 263A costs (attach schedule)."

One caution on Amazon's own fees. The regulation says an indirect cost can belong to inventory "even if the costs are calculated as a percentage of revenue," are set per unit sold, or are "incurred only upon the sale of inventory." The way a fee is billed does not decide its tax treatment. Put each Amazon fee type in front of your CPA by name.

What Stays Out: Distribution, Pick and Pack, Selling

The word "freight" is where a year-end summary of UNICAP can go wrong. The regulation splits it in two. Freight in is generally capitalized. Freight out is not: "Distribution costs are not required to be capitalized. Distribution costs are any transportation costs incurred outside a storage facility in delivering goods to a customer." For this purpose, the regulation treats costs on the loading dock as incurred outside the storage facility.

Inside the warehouse, the regulation draws the line at the customer's order. Handling inside a storage facility must generally be capitalized, "However, costs attributable to pick and pack activities inside a storage or warehousing facility are not required to be capitalized." Pick and pack means work done "in preparation for imminent shipment to a particular customer after the customer has ordered the specific goods in question": pulling the goods, packing them for that customer and staging them for shipment.

The regulation is just as specific about what does not count as pick and pack. Unloading goods received for storage, checking quantity and quality, comparing received quantities to the purchase order, moving goods to bins or racks, and storing them all stay on the capitalized side. So do occupancy costs of the warehouse, such as "rent, depreciation, insurance, security, taxes, utilities, and maintenance."

For an FBA brand, the reading that follows is this, again for your CPA to confirm. The FBA fulfillment fee pays Amazon to pick, pack and ship an order a customer has already placed, which fits the pick and pack and distribution exclusions. A 3PL's charge for picking and shipping a direct-to-consumer order fits the same way. The 3PL's receiving charge, its prep charge and its monthly storage do not. Advertising is out as well.

Kitting: Assembly or Production?

Kitting is the line most likely to change the method, not just the amount. Handling costs are capitalized under the resale rules "provided the activities do not come within the meaning of the term produce as defined in § 1.263A-2(a)(1)." Treas. Reg. 1.263A-2 says produce "includes the following: construct, build, install, manufacture, develop, improve, create, raise, or grow."

A bundle that places two finished items in one bag with a new label looks like the regulation's example of assembling, "attaching wheels and handlebars to a bicycle acquired for resale." A kit that combines components into a product that did not exist before may read as "create" or "manufacture." The regulation does not draw that line for you. The cost is capitalized either way; what changes is the allocation rules.

Two provisions matter if a kit is production:

• Production under contract counts as yours. "Property produced for the taxpayer under a contract with another party is treated as property produced by the taxpayer to the extent the taxpayer makes payments or otherwise incurs costs with respect to the property." A kit a 3PL builds for you under an agreement falls under this sentence if the kit is production.
• A reseller can keep the simplified resale method in two cases. The first is when production is de minimis. It is presumed so when gross receipts from produced property are under 10 percent of the business's gross receipts and production labor is under 10 percent of its labor costs. The second is when an unrelated person produces the property "under a contract ... entered into incident to its resale activities and the property is sold to its customers." The regulation's own example of the second is private label goods.

If kits are a large share of revenue, the CPA should decide before the close whether they are assembly or production, and whether the simplified resale method is still available.

What Changes at the December 31 Close

Capitalizing a cost does not mean losing the deduction. It means deferring part of it. Under the simplified resale method in Treas. Reg. 1.263A-3(d), the method the Form 1125-A instructions describe, the additional section 263A costs are computed for "eligible property remaining on hand at the close of the taxable year" and "added to the taxpayer's ending section 471 costs." The rest of the year's handling, storage and purchasing costs flow through cost of goods sold in the same year.

In practice, the December 31 close needs:

• A count by location. Your own warehouse, the 3PL, AWD, FBA and goods in transit. Amazon's Inventory Ledger report shows "your starting balance, all inventory movements (received, sold, returned, removed, damaged, lost, found, and adjusted), and ending balance," with up to 18 months of history.
• December costs that arrive in January. Amazon charges monthly inventory storage fees "typically between the 7th and 15th day of the month, in the month following when the fees were incurred." It charges the FBA inbound placement service fee "45 days after your shipment is received." A shipment received in December is charged in January or February of the next year. Which year those costs belong to, and whether placement is handling or inbound transportation, are accrual questions for the CPA.
• AWD fees by type. Amazon's AWD fee page lists storage, inbound and outbound processing, and transportation fees, each a separate line to classify.
• Vendor invoices with freight separated. IRS Publication 538 says the cost of purchased merchandise is "the invoice price minus appropriate discounts plus transportation or other charges incurred in acquiring the goods," and that it can include costs capitalized under Section 263A.

A brand over the threshold for the first time also has a method change to make. Treas. Reg. 1.263A-1(j)(3) says moving from the small business exemption to applying Section 263A "is a change in method of accounting." Rev. Proc. 2025-23, section 12.01, makes it an automatic change for "a reseller that is a former small business taxpayer" moving to a UNICAP method "in the first taxable year that it does not qualify as a small business taxpayer." The designated automatic change number is "22." Rev. Proc. 2025-23 remains the list in force, as modified by Rev. Proc. 2025-28 and Rev. Proc. 2026-32. Both changed its section 7, and Rev. Proc. 2026-32 also changed section 19; neither changed section 12.

Under the Instructions for Form 3115, the original form for an automatic change is attached "to the filer's timely filed (including extensions) federal income tax return for the year of change." A signed copy goes to the IRS, at the Ogden, Utah address in the instructions' Address Chart or by fax, "no earlier than the first day of the year of change and no later than the date the original is filed." The filing happens in 2027, with the 2026 return. The work that makes it possible happens now: the split invoices, the count as of December 31, and a revaluation of the inventory on hand at the start of 2026 as if Section 263A had always applied. Under Treas. Reg. 1.263A-7, the difference between the inventory "as originally valued" and "as revalued" is "the amount of the adjustment required under section 481(a)."

The IRS example in section 12.01 shows the mechanics: a reseller averaging $27,000,000 against a $26,000,000 threshold changed methods in 2019, added $800,000 of additional section 263A costs to its beginning inventory, and took that Section 481(a) adjustment into income one-fourth a year over four years.

"Past the small business test, the inbound freight, prep and 3PL storage you paid this year may belong in inventory, not in expenses. Ask your CPA before December 31, not after."

Bernardo Campelo, Founder of PrepVia

What to Ask Your 3PL Before Year End

The regulation decides which costs are capitalized. The invoice decides whether your team can find them. A 3PL invoice that bills one blended "fulfillment" amount per unit forces the controller to estimate a split after the fact, and an estimate is weaker support than a line item. Ask any 3PL you use, before December, for invoices that separate the following:

• Receiving. Unloading, counting, inspection and put-away, by shipment or container.
• Prep. Labeling, polybagging, bubble wrap and box packing for FBA, by SKU or shipment.
• Kitting and bundling. On its own line, with the kit SKU, so the CPA can decide assembly or production.
• Storage. By month and by location, with the service period on the invoice, so December storage billed in January lands in the right year.
• Inbound freight. Freight into the 3PL, separate from freight out of it.
• Freight to Amazon or AWD. Transfers between storage facilities, by shipment ID.
• Pick, pack and ship to customers. Direct-to-consumer and marketplace orders, apart from everything above.
• A year-end count. Units on hand by SKU as of the close of December 31, in the same unit your books use.

A prep center or 3PL can give you the records, not the tax treatment. The classification, the allocation method and the Form 3115 belong to your CPA.

At PrepVia, the work that maps to these lines is FBA prep (receiving, inspection, counting, labeling, bagging, box packing, pallet building and inbound shipment creation), kitting, and 3PL storage. Receiving and inspection are included, and storage is billed daily, on the space used. Pricing is quoted per account on a free 15-minute call. The warehouse is at 8507 NW 72nd St, Miami, FL 33166. Before signing with any provider, ask to see how its invoice separates the lines above.

Frequently Asked Questions

What is the Section 263A small business threshold for 2026?

For taxable years beginning in 2026, a business meets the Section 448(c) gross receipts test if its average annual gross receipts for the three prior taxable years do not exceed $32,000,000, per Rev. Proc. 2025-32. A business that meets the test, and is not a tax shelter, is exempt from Section 263A for that year. Related entities under common control are tested together.

Does UNICAP apply to an Amazon seller that only resells and does not manufacture?

Yes, once it is above the threshold. Section 263A(b)(2) covers property "acquired by the taxpayer for resale," and resellers capitalize the purchasing, handling and storage costs allocable to their goods.

Are FBA prep and labeling costs part of inventory cost?

On the plain reading of Treas. Reg. 1.263A-3(c)(4), likely yes: handling costs include repackaging and "sorting, tagging, and marking," and are generally capitalized. The regulation does not name FBA or FNSKU labels, so confirm the treatment with your CPA.

Is all freight capitalized?

No. Freight from the vendor to you, and from one of your storage facilities to another, is generally capitalized. Shipping to the customer is a distribution cost and is not required to be capitalized, and neither is pick and pack done after the customer orders.

Do I lose the deduction for these costs?

No. Only the share allocable to goods still on hand at year end is added to ending inventory. The rest flows through cost of goods sold in the same year, and the capitalized share is recovered when those goods sell.

What if this is our first year above the threshold?

Rev. Proc. 2025-23 makes the move to a UNICAP method in that first year an automatic method change, number 22. The original Form 3115 goes with the timely filed return for the year of change, including extensions, and a signed copy goes to the IRS at the Ogden, Utah address in the Form 3115 instructions, or by fax.

Can kitting change the rules that apply?

It can. Assembling to ready goods for resale is a handling cost, but if a kit counts as "produce" under Treas. Reg. 1.263A-2, the producer rules apply. A reseller with de minimis production, or with goods produced under contract by an unrelated person incident to resale, can still use the simplified resale method. Your CPA should decide which applies.

Final Take

For a brand above $32,000,000 in average gross receipts, the 2026 question is not whether prep, kitting and 3PL storage are real costs. They are, and the regulation names the categories they fall into: processing, assembling, repackaging, transporting and off-site storage. The question is how much of them is still sitting in ending inventory on December 31, and whether the books can show it line by line. Under the regulation, distribution and pick and pack generally stay out, inbound freight and off-site storage generally go in, and a kit may need a separate decision.

None of this is tax advice. It is the list to take to your CPA in November, while December invoicing and the year-end count can still change.