§ 263A. Capitalization and inclusion in inventory costs of certain expenses
(a)
Nondeductibility of certain direct and indirect costs
(1)
In general
In the case of any property to which this section applies, any costs described in paragraph (2)—
(2)
Allocable costs
The costs described in this paragraph with respect to any property are—
(B)
such property’s proper share of those indirect costs (including taxes) part or all of which are allocable to such property.
Any cost which (but for this subsection) could not be taken into account in computing taxable income for any taxable year shall not be treated as a cost described in this paragraph.
(b)
Property to which section applies
Except as otherwise provided in this section, this section shall apply to—
(2)
Property acquired for resale
(B)
Exception for taxpayer with gross receipts of $10,000,000 or less
Subparagraph (A) shall not apply to any personal property acquired during any taxable year by the taxpayer for resale if the average annual gross receipts of the taxpayer (or any predecessor) for the 3-taxable year period ending with the taxable year preceding such taxable year do not exceed $10,000,000.
For purposes of paragraph (1), the term “tangible personal property” shall include a film, sound recording, video tape, book, or similar property.
(c)
General exceptions
(1)
Personal use property
This section shall not apply to any property produced by the taxpayer for use by the taxpayer other than in a trade or business or an activity conducted for profit.
(2)
Research and experimental expenditures
This section shall not apply to any amount allowable as a deduction under section
174.
(4)
Coordination with long-term contract rules
This section shall not apply to any property produced by the taxpayer pursuant to a long-term contract.
(d)
Exception for farming businesses
(1)
Section not to apply to certain property
(2)
Treatment of certain plants lost by reason of casualty
(A)
In general
If plants bearing an edible crop for human consumption were lost or damaged (while in the hands of the taxpayer) by reason of freezing temperatures, disease, drought, pests, or casualty, this section shall not apply to any costs of the taxpayer of replanting plants bearing the same type of crop (whether on the same parcel of land on which such lost or damaged plants were located or any other parcel of land of the same acreage in the United States).
(B)
Special rule for person with minority interest who materially participates
Subparagraph (A) shall apply to amounts paid or incurred by a person (other than the taxpayer described in subparagraph (A)) if—
(i)
the taxpayer described in subparagraph (A) has an equity interest of more than 50 percent in the plants described in subparagraph (A) at all times during the taxable year in which such amounts were paid or incurred, and
(3)
Election to have this section not apply
(A)
In general
If a taxpayer makes an election under this paragraph, this section shall not apply to any plant produced in any farming business carried on by such taxpayer.
(C)
Special rule for citrus and almond growers
An election under this paragraph shall not apply with respect to any item which is attributable to the planting, cultivation, maintenance, or development of any citrus or almond grove (or part thereof) and which is incurred before the close of the 4th taxable year beginning with the taxable year in which the trees were planted. For purposes of the preceding sentence, the portion of a citrus or almond grove planted in 1 taxable year shall be treated separately from the portion of such grove planted in another taxable year.
(D)
Election
Unless the Secretary otherwise consents, an election under this paragraph may be made only for the taxpayer’s 1st taxable year which begins after December 31, 1986, and during which the taxpayer engages in a farming business. Any such election, once made, may be revoked only with the consent of the Secretary.
(e)
Definitions and special rules for purposes of subsection (d)
(1)
Recapture of expensed amounts on disposition
(A)
In general
In the case of any plant with respect to which amounts would have been capitalized under subsection (a) but for an election under subsection (d)(3)—
(i)
such plant (if not otherwise section
1245 property) shall be treated as section
1245 property, and
(ii)
for purposes of section
1245, the recapture amount shall be treated as a deduction allowed for depreciation with respect to such property.
(2)
Effects of election on depreciation
(A)
In general
If the taxpayer (or any related person) makes an election under subsection (d)(3), the provisions of section
168
(g)(2) (relating to alternative depreciation) shall apply to all property of the taxpayer used predominantly in the farming business and placed in service in any taxable year during which any such election is in effect.
(B)
Related person
For purposes of subparagraph (A), the term “related person” means—
(ii)
any corporation (including an S corporation) if 50 percent or more (in value) of the stock of such corporation is owned (directly or through the application of section
318) by the taxpayer or members of the taxpayer’s family,
(3)
Preproductive period
(A)
In general
For purposes of this section, the term “preproductive period” means—
(i)
in the case of a plant which will have more than 1 crop or yield, the period before the 1st marketable crop or yield from such plant, or
(ii)
in the case of any other plant, the period before such plant is reasonably expected to be disposed of.
For purposes of this subparagraph, use by the taxpayer in a farming business of any supply produced in such business shall be treated as a disposition.
(4)
Farming business
For purposes of this section—
(f)
Special rules for allocation of interest to property produced by the taxpayer
(1)
Interest capitalized only in certain cases
Subsection (a) shall only apply to interest costs which are—
(2)
Allocation rules
(A)
In general
In determining the amount of interest required to be capitalized under subsection (a) with respect to any property—
(3)
Interest relating to property used to produce property
This subsection shall apply to any interest on indebtedness allocable (as determined under paragraph (2)) to property used to produce property to which this subsection applies to the extent such interest is allocable (as so determined) to the produced property.
(g)
Production
For purposes of this section—
(1)
In general
The term “produce” includes construct, build, install, manufacture, develop, or improve.
(2)
Treatment of property produced under contract for the taxpayer
The taxpayer shall be treated as producing any property produced for the taxpayer under a contract with the taxpayer; except that only costs paid or incurred by the taxpayer (whether under such contract or otherwise) shall be taken into account in applying subsection (a) to the taxpayer.
(h)
Exemption for free lance authors, photographers, and artists
(1)
In general
Nothing in this section shall require the capitalization of any qualified creative expense.
(2)
Qualified creative expense
For purposes of this subsection, the term “qualified creative expense” means any expense—
(A)
which is paid or incurred by an individual in the trade or business of such individual (other than as an employee) of being a writer, photographer, or artist, and
Such term does not include any expense related to printing, photographic plates, motion picture films, video tapes, or similar items.
(3)
Definitions
For purposes of this subsection—
(A)
Writer
The term “writer” means any individual if the personal efforts of such individual create (or may reasonably be expected to create) a literary manuscript, musical composition (including any accompanying words), or dance score.
(B)
Photographer
The term “photographer” means any individual if the personal efforts of such individual create (or may reasonably be expected to create) a photograph or photographic negative or transparency.
(C)
Artist
(i)
In general
The term “artist” means any individual if the personal efforts of such individual create (or may reasonably be expected to create) a picture, painting, sculpture, statue, etching, drawing, cartoon, graphic design, or original print edition.
(D)
Treatment of certain corporations
(i)
In general
If—
(I)
substantially all of the stock of a corporation is owned by a qualified employee-owner and members of his family (as defined in section
267
(c)(4)), and
(II)
the principal activity of such corporation is performance of personal services directly related to the activities of the qualified employee-owner and such services are substantially performed by the qualified employee-owner,
this subsection shall apply to any expense of such corporation which directly relates to the activities of such employee-owner in the same manner as if such expense were incurred by such employee-owner.
(i)
Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including—