Section 1.263A-0 - Outline of regulations under section 263AThis section lists the paragraphs in §§ 1.263A-1 through 1.263A-4 and §§ 1.263A-7 through 1.263A-15 as follows:
§ 1.263A-1 Uniform Capitalization of Costs.(a) Introduction. (3) General scope. (i) Property to which section 263A applies.(iii) Property acquired for resale.(iv) Inventories valued at market.(v) Property produced in a farming business.(vii) Property produced or property acquired for resale by foreign persons.(b) Exceptions. (1) Small business taxpayers.(3) Costs incurred in certain farming businesses.(4) Costs incurred in raising, harvesting, or growing timber.(5) Qualified creative expenses.(6) Certain not-for-profit activities.(7) Intangible drilling and development costs.(8) Natural gas acquired for resale.(9) Research and experimental expenditures.(10) Certain property that is substantially constructed.(11) Certain property provided incident to services.(ii) Definition of services.(iii) De minimis property provided incident to services.(12) De minimis rule for certain producers with total indirect costs of $200,000 or less.(13) Exception for the origination of loans.(c) General operation of section 263A. (2) Otherwise deductible.(4) Recovery of capitalized costs.(5) Costs allocable only to property sold.(d) Definitions. (1) Self-constructed assets.(2) Section 471 costs. (ii) Inclusion of direct costs. (B) Allocation of direct costs.(iii) Alternative method to determine amounts of section 471 costs by using taxpayer's financial statement.(B) Book-to-tax adjustments.(C) Exclusion of certain financial statement items.(D) Changes in method of accounting.(iv) De minimis rule exceptions for certain direct costs.(B) De minimis rule for certain direct labor costs.(C) De minimis rule for certain direct material costs.(D) Taxpayers using a historic absorption ratio.(v) Safe harbor method for certain variances and under or over-applied burdens. (B) Consistency requirement.(C) Allocation of variances and under or over-applied burdens between production and preproduction costs under the modified simplified production method.(D) Allocation of variances and under or over-applied burdens between storage and handling costs absorption ratio and purchasing costs absorption ratio under the simplified resale method.(E) Method of accounting.(vi) Removal of section 471 costs.(3) Additional section 263A costs. (ii) Negative adjustments. (B) Exception for certain taxpayers removing costs from section 471 costs.(C) No negative adjustments for cash or trade discounts.(D) No negative adjustments for certain expenses.(E) Consistency requirement for negative adjustments.(5) Classification of costs.(e) Types of costs subject to capitalization. (2) Direct costs. (i) Producers. (A) Direct material costs.(3) Indirect costs. (ii) Examples of indirect costs required to be capitalized.(A) Indirect labor costs.(B) Officers' compensation.(C) Pension and other related costs.(D) Employee benefit expenses.(E) Indirect material costs.(O) Repairs and maintenance.(P) Engineering and design costs.(U) Licensing and franchise costs.(W) Capitalizable service costs.(iii) Indirect costs not capitalized.(A) Selling and distribution costs.(B) Research and experimental expenditures.(E) Cost recovery allowances on temporarily idle equipment and facilities. (F) Taxes assessed on the basis of income.(H) Warranty and product liability costs.(I) On-site storage costs.(J) Unsuccessful bidding expenses.(K) Deductible service costs.(4) Service costs. (i) Introduction. (A) Definition of service costs.(B) Definition of service departments.(ii) Various service cost categories.(A) Capitalizable service costs.(B) Deductible service costs.(iii) Examples of capitalizable service costs.(iv) Examples of deductible service costs.(f) Cost allocation methods.(2) Specific identification method.(3) Burden rate and standard cost methods.(i) Burden rate method.(B) Development of burden rates.(C) Operation of the burden rate method.(ii) Standard cost method.(B) Treatment of variances.(4) Reasonable allocation methods.(g) Allocating categories of costs. (4) Service costs. (iii) Methods for allocating mixed service costs.(A) Direct reallocation method.(B) Step-allocation method.(iv) Illustrations of mixed service cost allocations using reasonable factors or relationships. (C) Centralized payroll services.(D) Centralized data processing services.(E) Engineering and design services.(F) Safety engineering services.(v) Accounting method change.(h) Simplified service cost method.(2) Eligible property. (i) In general. (B) Non-inventory property held for sale.(C) Certain self-constructed assets.(D) Self-constructed assets produced on a repetitive basis.(ii) Election to exclude self-constructed assets.(3) General allocation formula.(4) Labor-based allocation ratio.(5) Production cost allocation ratio.(6) Definition of total mixed service costs.(7) Costs allocable to more than one business.(j) Exemption for certain small business taxpayers.(2) Application of the section 448(c) gross receipts test.(ii) Gross receipts of individuals, etc.(iii) Partners and S corporation shareholders.(3) Change in method of accounting. (ii) Prior section 263A method change.(k) Special rules(1) Costs provided by a related person.(2) Optional capitalization of period costs. (ii) Period costs eligible for capitalization.(3) Trade or business application(4) Transfers with a principal purpose of tax avoidance. [Reserved](l) Change in method of accounting.(4) Section 481(a) adjustment.(5) Time for requesting change.(m) Effective/applicability date. (2) Mixed service costs; self-constructed tangible personal property produced on a routine and repetitive basis.(3) Costs allocable to property sold; indirect costs; licensing and franchise costs.(4) Materials and supplies.(5) Definitions of section 471 costs and additional section 263A costs.(6) Exemption for certain small business taxpayers.§ 1.263A-2 Rules Relating to Property Produced by the Taxpayer.(a) In general. (1) Produce. (ii) Ownership. (B) Property produced for the taxpayer under a contract.(2) Definition of contract.(C) Home construction contracts.(2) Tangible personal property. (ii) Intellectual or creative property. (A) Intellectual or creative property that is tangible personal property. (B) Intellectual or creative property that is not tangible personal property. (2) Property provided incident to services.(3) Costs required to be capitalized by producers.(ii) Pre-production costs.(iii) Post-production costs.(4) Practical capacity concept.(5) Taxpayers required to capitalize costs under this section.(b) Simplified production method. (2) Eligible property. (i) In general. (B) Non-inventory property held for sale.(C) Certain self-constructed assets.(D) Self-constructed assets produced on a repetitive basis.(ii) Election to exclude self-constructed assets.(3) Simplified production method without historic absorption ratio election. (i) General allocation formula.(ii) Definitions. (A) Absorption ratio. (1) Additional section 263A costs incurred during the taxable year.(2) Section 471 costs incurred during the taxable year.(B) Section 471 costs remaining on hand at year end.(C) Costs allocable only to property sold.(iii) LIFO taxpayers electing the simplified production method. (iv) De minimis rule for producers with total indirect costs of $200,000 or less. (B) Related party and aggregation rules.(4) Simplified production method with historic absorption ratio election. (ii) Operating rules and definitions. (A) Historic absorption ratio.(C) Qualifying period. (2) Extension of qualifying period.(iii) Method of accounting.(B) Revocation of election.(iv) Reporting and recordkeeping requirements.(v) Transition rules. (A) Transition to elect historic absorption ratio.(B) Transition to revoke historic absorption ratio.(c) Modified simplified production method. (2) Eligible property. (ii) Election to exclude self-constructed assets.(3) Modified simplified production method without historic absorption ratio election. (i) General allocation formula. (B) Effect of allocation.(ii) Definitions. (A) Direct material costs.(B) Pre-production absorption ratio. (1) Pre-production additional section 263A costs.(2) Pre-production section 471 costs.(C) Pre-production section 471 costs remaining on hand at year end.(D) Production absorption ratio. (1) Production additional section 263A costs.(2) Residual pre-production additional section 263A costs.(3) Production section 471 costs.(4) Direct materials adjustment.(E) Production section 471 costs remaining on hand at year end.(F) Costs allocated to property sold.(iii) Allocable mixed service costs. (B) Taxpayer using the simplified service cost method.(iv) LIFO taxpayers electing the modified simplified production method. (B) LIFO increment. (2) Combined absorption ratio defined.(v) De minimis rule for producers with total indirect costs of $200,000 or less.(4) Modified simplified production method with historic absorption ratio election.(ii) Operating rules and definitions.(A) Pre-production historic absorption ratio.(B) Production historic absorption ratio.(iii) LIFO taxpayers making the historic absorption ratio election.(B) Combined historic absorption ratio. (1) Total allocable additional section 263A costs incurred during the test period.(2) Total section 471 costs remaining on hand at each year end of the test period.(iv) Extension of qualifying period.(d) Additional simplified methods for producers.(f) Change in method of accounting. (4) Section 481(a) adjustment.(5) Time for requesting change.(g) Effective/applicability date.§ 1.263A-3 Rules Relating to Property Acquired for Resale (a) Capitalization rules for property acquired for resale.(2) Resellers with production activities. (ii) Exemption for small business taxpayers.(iii) De minimis production activities.(3) Resellers with property produced under a contract.(4) Use of the simplified resale method. (ii) Resellers with de minimis production activities.(iii) Resellers with property produced under a contract.(iv) Application of simplified resale method.(5)De minimis production activities.(ii) Definition of gross receipts to determine de minimis production activities.(c) Purchasing, handling, and storage costs. (2) Costs attributable to purchasing, handling, and storage.(3) Purchasing costs. (ii) Determination of whether personnel are engaged in purchasing activities.(A)1/3- 2/3 rule for allocating labor costs.(4) Handling costs. (v) Transportation costs.(vi) Costs not considered handling costs. (B) Delivery of custom-ordered items.(C) Repackaging after sale occurs.(5) Storage costs.(ii) Definitions. (A) On-site storage facility.(B) Retail sales facility.(C) An integral part of a retail sales facility.(E) Retail customer. (2) Certain non-retail customers treated as retail customers.(F) Off-site storage facility.(G) Dual-function storage facility.(iii) Treatment of storage costs incurred at a dual-function storage facility.(B) Dual-function storage facility allocation ratio.(2) Illustration of ratio allocation.(3) Appropriate adjustments for other uses of a dual-function storage facility.(C) De minimis 90-10 rule for dual-function storage facilities.(iv) Costs not attributable to an off-site storage facility.(d) Simplified resale method.(3) Simplified resale method without historic absorption ratio election. (i) General allocation formula. (B) Effect of allocation.(C) Definitions. (1) Combined absorption ratio.(2) Section 471 costs remaining on hand at year end.(3) Costs allocable only to property sold.(D) Storage and handling costs absorption ratio.(E) Purchasing costs absorption ratio.(F) Allocable mixed service costs.(ii) LIFO taxpayers electing simplified resale method. (iii) Permissible variations of the simplified resale method.(4) Simplified resale method with historic absorption ratio election. (ii) Operating rules and definitions. (A) Historic absorption ratio.(C) Qualifying period. (2) Extension of qualifying period.(iii) Method of accounting.(B) Revocation of election.(iv) Reporting and recordkeeping requirements.(v) Transition rules. (A) Transition to elect historic absorption ratio.(B) Transition to revoke historic absorption ratio.(5) Additional simplified methods for resellers.(f) Effective/applicability date.§ 1.263A-4 Rules for property produced in a farming business. (a) Introduction. (3) Exemption for certain small business taxpayers.(4) Costs required to be capitalized or inventoried under another provision.(5) Farming business. (ii) Incidental activities. (B) Activities that are not incidental.(b) Application of section 263A to property produced in a farming business. (2) Preproductive period. (i) Plant. (B) Applicability of section 263A.(C) Actual preproductive period. (1) Beginning of the preproductive period.(2) End of the preproductive period.(ii) Marketable quantities.(ii) Animal. (A) Beginning of the preproductive period.(B) End of the preproductive period.(C) Allocation of costs between animal and first yield.(c) Inventory methods. (2) Available for property used in a trade or business.(3) Exclusion of property to which section 263A does not apply.(d) Election not to have section 263A apply under section 263A(d)(3).(2) Availability of the election.(3) Time and manner of making the election.(ii) Nonautomatic election.(4) Special rules.(i) Section 1245 treatment.(ii) Required use of alternative depreciation system.(5) Revocation of section 263A(d)(3) election to permit exemption under section 263A(i).(6) Change from applying exemption under section 263A(i) to making a section 263A(d)(3) election.(e) Exception for certain costs resulting from casualty losses.(4) Special rule for citrus and almond groves.(5) Special temporary rule for citrus plants lost by reason of casualty.(f) Change in method of accounting. (2) Change in method of accounting.(g) Effective date. (2) Changes made by Tax Cuts and Jobs Act (Pub. L. 115-97 ).§ 1.263A-7 Changing a method of accounting under section 263A. (a) Introduction. (2) Taxpayers that adopt a method of accounting under section 263A.(3) Taxpayers that change a method of accounting under section 263A.(4) Applicability dates. (ii) Changes made by Tax Cuts and Jobs Act (Pub. L. 115-97 ).(5) Definition of change in method of accounting.(b) Rules applicable to a change in method of accounting. (2) Special rules. (i) Ordering rules when multiple changes in method of accounting occur in the year of change. (B) Exceptions to the general ordering rule. (1) Change from the LIFO inventory method.(2) Change from the specific goods LIFO inventory method.(3) Change in overall method of accounting.(4) Change in method of accounting for depreciation.(ii) Adjustment required by section 481(a).(iii) Base year. (A) Need for a new base year. (1) Facts and circumstances revaluation method used.(2) 3-year average method used.(i) Simplified method not used.(ii) Simplified method used.(B) Computing a new base year.(c) Inventory. (1) Need for adjustments.(2) Revaluing beginning inventory. (ii) Methods to revalue inventory.(iii) Facts and circumstances revaluation method.(C) Estimates and procedures allowed.(D) Use by dollar-value LIFO taxpayers.(iv) Weighted average method. (B) Weighted average method for FIFO taxpayers.(C) Weighted average method for specific goods LIFO taxpayers.(D) Adjustments to inventory costs from prior years.(v) 3-year average method. (B) Consecutive year requirement.(E) Adjustments to inventory costs from prior years.(2) Examples of costs eligible for restatement adjustment procedure.(F) Restatement adjustment procedure. (2) Examples of restatement adjustment procedure.(3) Intercompany items. (i) Revaluing intercompany transactions.(iii) Availability of revaluation methods.(4) Anti-abuse rule.(ii) Deemed avoidance of this section. (iii) Election to use transferor's LIFO layers.(iv) Tax avoidance intent not required.(d) Non-inventory property. (1) Need for adjustments.§ 1.263A-8 Requirement to capitalize interest. (a) In general. (2) Treatment of interest required to be capitalized.(3) Methods of accounting under section 263A(f).(b) Designated property. (2) Special rules. (i) Application of thresholds.(ii) Relevant activities and costs.(iii) Production period and cost of production.(4) De minimis rule. (ii) Determination of total production expenditures.(c) Definition of real property. (2) Unsevered natural products of land.(3) Inherently permanent structures.(4) Machinery. (ii) Certain factors not determinative.(d) Production. (1) Definition of produce.(2) Property produced under a contract. (iii) Definition of a contract.(iv) Determination of whether thresholds are satisfied.(v) Exclusion for property subject to long-term contract rules.(3) Improvements to existing property. (iii) Tangible personal property.§ 1.263A-9 The avoided cost method. (a) In general. (2) Overview. (ii) Rules that apply in determining amounts.(3) Definitions of interest and incurred.(4) Definition of eligible debt.(b) Traced debt amount. (2) Identification and definition of traced debt.(c) Excess expenditure amount. (2) Interest required to be capitalized.(4) Treatment of interest subject to a deferral provision.(5) Definitions.(ii) Average excess expenditures. (iii) Weighted average interest rate. (A) Determination of rate.(B) Interest incurred on nontraced debt.(C) Average nontraced debt.(D) Special rules if taxpayer has no nontraced debt or rate is contingent.(7) Special rules where the excess expenditure amount exceeds incurred interest. (i) Allocation of total incurred interest to units.(ii) Application of related person rules to average excess expenditures.(iii) Special rule for corporations.(d) Election not to trace debt. (e) Election to use external rate. (f) Selection of computation period and measurement dates and application of averaging conventions. (1) Computation period. (ii) Method of accounting.(iii) Production period beginning or ending during the computation period.(2) Measurement dates. (iii) Measurement dates on which accumulated production expenditures must be taken into account.(iv) More frequent measurement dates.(g) Special rules.(1) Ordering rules. (i) Provisions preempted by section 263A(f).(ii) Deferral provisions applied before this section.(2) Application of section 263A(f) to deferred interest.(ii) Capitalization of deferral amount.(iii) Deferred capitalization.(iv) Substitute capitalization.(B) Capitalization of amount carried forward.(C) Method of accounting.(3) Simplified inventory method. (ii) Segmentation of inventory. (iii) Aggregate interest capitalization amount.(A) Computation period and weighted average interest rate.(B) Computation of the tentative aggregate interest capitalization amount.(C) Coordination with other interest capitalization computations.(3) Other coordinating provisions.(D) Treatment of increases or decreases in the aggregate interest capitalization amount.(iv) Method of accounting.(4) Financial accounting method disregarded.(5) Treatment of intercompany transactions. (ii) Special rule for consolidated group with limited outside borrowing.(6) Notional principal contracts and other derivatives. [Reserved](7) 15-day repayment rule.§ 1.263A-10 Unit of property.(b) Units of real property. (2) Functional interdependence.(4) Allocation of costs to unit.(5) Treatment of costs when a common feature is included in a unit of real property.(ii) Production activity not undertaken on benefitted property. (A) Direct production activity not undertaken.(2) Land attributable to a benefitted property.(B) Suspension of direct production activity after clearing and grading undertaken. (2) Accumulated production expenditures.(iii) Common feature placed in service before the end of production of a benefitted property.(iv) Benefitted property sold before production completed on common feature.(v) Benefitted property placed in service before production completed on common feature.(c) Units of tangible personal property.(d) Treatment of installations.§ 1.263A-11 Accumulated production expenditures. (b) When costs are first taken into account. (2) Dedication rule for materials and supplies.(c) Property produced under a contract.(d) Property used to produce designated property.(3) Excluded equipment and facilities.(f) Mid-production purchases.(g) Related person costs.§ 1.263A-12 Production period. (b) Related person activities.(c) Beginning of production period. (3) Tangible personal property.(d) End of production period. (3) Sequential production or delivery.(e) Physical production activities.(f) Activities not considered physical production.(g) Suspension of production period. (3) Method of accounting.§ 1.263A-13 Oil and gas activities. (b) Generally applicable rules. (1) Beginning of production period. (ii) Offshore activities.(2) End of production period.(3) Accumulated production expenditures.(c) Special rules when definite plan not established.(2) Oil and gas units. (i) First productive well unit.(3) Beginning of production period. (i) First productive well unit.(4) End of production period.(5) Accumulated production expenditures. (i) First productive well unit.(ii) Subsequent well unit.(6) Allocation of interest capitalized with respect to first productive well unit.§ 1.263A-14 Rules for related persons.§ 1. 263A-15 Effective dates, transitional rules, and anti-abuse rule. (b) Transitional rule for accumulated production expenditures.(2) Property used to produce designated property.T.D. 8482, 58 FR 42207, Aug. 9, 1993, as amended by T.D. 8584, 59 FR 67196, Dec. 29, 1994; 60 FR 16574, Mar. 31, 1995; T.D. 8728, 62 FR 42054, Aug. 5, 1997; T.D. 8897, 65 FR 50643 , Aug. 21, 2000; T.D. 9636, 78 FR 57745 , Sept. 19, 2013; T.D. 9652, 79 FR 2096 , Jan. 13, 2014; T.D. 9843, 83 FR 58485 , Nov. 20, 2018; T.D, 9942, 86 FR 264 , Jan. 5, 2021; 86 FR 32185 , June 17, 2021 T.D. 9843, 83 FR 58485, 11/20/2018; T.D, 9942, 86 FR 264, 1/5/2021; 86 FR 32185, 6/17/2021