Many businesses, including both manufacturers and distributors, offer up-front incentive payments to customers in exchange for the customers’ commitment to purchase the manufacturer or distributor’s products. In a recent private letter ruling (PLR), the IRS concluded that certain types of incentive payments are required to be capitalized while other types of incentive payments may be currently deducted when paid.
In PLR 201032025, the IRS reviewed incentive payments made with respect to three different categories of supply agreements utilized by a manufacturer. Under all three categories, the manufacturer is obligated to supply designated products on an as-needed basis, upon the demands of customers, and customers are generally obligated to purchase 100 percent of their requirements for the designated products from the manufacturer. Also, under all three categories, the purchase price for a product is adjusted periodically, usually annually, on the basis of the cost of the underlying raw materials of the product, subject to appropriate volume discounts.
