Table of Contents
- What's New
- Introduction
- Topics - This chapter discusses:
- Useful Items - You may want to see:
- Carrying Charges
- Research and Experimental Costs
- Intangible Drilling Costs
- Exploration Costs
- Development Costs
- Circulation Costs
- Environmental Cleanup Costs
- Business Start-Up and Organizational Costs
- Reforestation Costs
- Retired Asset Removal Costs
- Barrier Removal Costs
- Film and Television Production Costs
Environmental cleanup costs. The election to deduct qualified environmental cleanup costs expired for costs paid or incurred after December 31, 2007. See Environmental Cleanup Costs.
This chapter discusses costs you can elect to deduct or capitalize.
You generally deduct a cost as a current business expense by subtracting it from your income in either the year you incur it or the year you pay it.
If you capitalize a cost, you may be able to recover it over a period of years through periodic deductions for amortization, depletion, or depreciation. When you capitalize a cost, you add it to the basis of property to which it relates.
A partnership, corporation, estate, or trust makes the election to deduct or capitalize the costs discussed in this chapter except for exploration costs for mineral deposits. Each individual partner, shareholder, or beneficiary elects whether to deduct or capitalize exploration costs.
You may be subject to the alternative minimum tax (AMT) if you deduct research and experimental, intangible drilling, exploration, development, circulation, and business organizational costs.
For more information on the alternative minimum tax, see the instructions for one of the following forms.
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Form 6251, Alternative Minimum Tax—Individuals.
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Form 4626, Alternative Minimum Tax—Corporations.
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Carrying charges
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Research and experimental costs
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Intangible drilling costs
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Exploration costs
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Development costs
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Circulation costs
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Environmental cleanup costs
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Business start-up and organizational costs
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Reforestation costs
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Retired asset removal costs
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Barrier removal costs
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Film and television production costs
Publication
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544 Sales and Other Dispositions of Assets
Form (and Instructions)
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3468
Investment Credit -
8826
Disabled Access Credit
See chapter 12 for information about getting publications and forms.
Carrying charges include the taxes and interest you pay to carry or develop real property or to carry, transport, or install personal property. Certain carrying charges must be capitalized under the uniform capitalization rules. (For information on capitalization of interest, see chapter 4.) You can elect to capitalize carrying charges not subject to the uniform capitalization rules, but only if they are otherwise deductible.
You can elect to capitalize carrying charges separately for each project you have and for each type of carrying charge. For unimproved and unproductive real property, your election is good for only 1 year. You must decide whether to capitalize carrying charges each year the property remains unimproved and unproductive. For other real property, your election to capitalize carrying charges remains in effect until construction or development is completed. For personal property, your election is effective until the date you install or first use it, whichever is later.
The costs of research and experimentation are generally capital expenses. However, you can elect to deduct these costs as a current business expense. Your election to deduct these costs is binding for the year it is made and for all later years unless you get IRS approval to make a change.
If you meet certain requirements, you may elect to defer and amortize research and experimental costs. For information on electing to defer and amortize these costs, see Research and Experimental Costs in chapter 8.
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Formula.
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Invention.
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Patent.
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Pilot model.
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Process.
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Technique.
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Property similar to the items listed above.
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Advertising or promotions.
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Consumer surveys.
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Efficiency surveys.
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Management studies.
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Quality control testing.
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Research in connection with literary, historical, or similar projects.
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The acquisition of another's patent, model, production, or process.
IF you . . . | THEN . . . |
Elect to deduct research and experimental costs as a current business expense | Deduct all research and experimental costs in the first year you pay or incur the costs and all later years. |
Do not deduct research and experimental costs as a current business expense | If you meet the requirements, amortize them over at least 60 months, starting with the month you first receive an economic benefit from the research. See Research and Experimental Costs in chapter 8. |
The costs of developing oil, gas, or geothermal wells are ordinarily capital expenditures. You can usually recover them through depreciation or depletion. However, you can elect to deduct intangible drilling costs (IDCs) as a current business expense. These are certain drilling and development costs for wells in the United States in which you hold an operating or working interest. You can deduct only costs for drilling or preparing a well for the production of oil, gas, or geothermal steam or hot water.
You can elect to deduct only the costs of items with no salvage value. These include wages, fuel, repairs, hauling, and supplies related to drilling wells and preparing them for production. Your cost for any drilling or development work done by contractors under any form of contract is also an IDC. However, see Amounts paid to contractor that must be capitalized, later.
You can also elect to deduct the cost of drilling exploratory bore holes to determine the location and delineation of offshore hydrocarbon deposits if the shaft is capable of conducting hydrocarbons to the surface on completion. It does not matter whether there is any intent to produce hydrocarbons.
If you do not elect to deduct your IDCs as a current business expense, you can elect to deduct them over the 60-month period beginning with the month they were paid or incurred.
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Amounts properly allocable to the cost of depreciable property, or
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Amounts paid only out of production or proceeds from production if these amounts are depletable income to the recipient.
The costs of determining the existence, location, extent, or quality of any mineral deposit are ordinarily capital expenditures if the costs lead to the development of a mine. You recover these costs through depletion as the mineral is removed from the ground. However, you can elect to deduct domestic exploration costs paid or incurred before the beginning of the development stage of the mine (except those for oil, gas, and geothermal wells).
Method 1—Include the deducted costs in gross income for the tax year the mine reaches the producing stage. Your election must be clearly indicated on the return. Increase your adjusted basis in the mine by the amount included in income. Generally, you must elect this recapture method by the due date (including extensions) of your return. However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Make the election on your amended return and write “Filed pursuant to section 301.9100-2” on the form where you are including the income. File the amended return at the same address you filed the original return. |
Method 2—Do not claim any depletion deduction for the tax year the mine reaches the producing stage and any later tax years until the depletion you would have deducted equals the exploration costs you deducted. |
You can deduct costs paid or incurred during the tax year for developing a mine or any other natural deposit (other than an oil or gas well) located in the United States. These costs must be paid or incurred after the discovery of ores or minerals in commercially marketable quantities. Development costs include those incurred for you by a contractor. Also, development costs include depreciation on improvements used in the development of ores or minerals. They do not include costs for the acquisition or improvement of depreciable property.
Instead of deducting development costs in the year paid or incurred, you can elect to treat them as deferred expenses and deduct them ratably as the units of produced ores or minerals benefited by the expenses are sold. This election applies each tax year to expenses paid or incurred in that year. Once made, the election is binding for the year and cannot be revoked for any reason.
A publisher can deduct as a current business expense the costs of establishing, maintaining, or increasing the circulation of a newspaper, magazine, or other periodical. For example, a publisher can deduct the cost of hiring extra employees for a limited time to get new subscriptions through telephone calls. Circulation costs are deductible even if they normally would be capitalized.
This rule does not apply to the following costs that must be capitalized.
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The purchase of land or depreciable property.
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The acquisition of circulation through the purchase of any part of the business of another publisher of a newspaper, magazine, or other periodical, including the purchase of another publisher's list of subscribers.
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Capitalize all circulation costs that are properly chargeable to a capital account.
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Amortize circulation costs over the 3-year period beginning with the tax year they were paid or incurred.
Environmental cleanup costs are generally capital expenditures. However, you can elect to deduct these costs as a current business expense if certain requirements (discussed later) are met. This special tax treatment is generally available for environmental cleanup costs you pay or incur before January 1, 2008.
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You hold it for use in a trade or business, for the production of income, or as inventory.
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There has been a release, threat of release, or disposal of any hazardous substance at or on the site.
Business start-up and organizational costs are generally capital expenditures. However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized. For information about amortizing start-up and organizational costs, see chapter 8.
Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Organizational costs include the costs of creating a corporation. For more information on start-up and organizational costs, see chapter 8.
Reforestation costs are generally capital expenditures. However, you can elect to deduct up to $10,000 ($5,000 if married filing separately; $0 for a trust) of qualifying reforestation costs paid or incurred after October 22, 2004, for each qualified timber property. This limit is increased for small timber producers with qualified timber property located in certain areas affected by Hurricanes Katrina, Rita, and Wilma. For more information, see Publication 4492. The remaining costs can be amortized over an 84-month period. For information about amortizing reforestation costs, see chapter 8.
Qualifying reforestation costs are the direct costs of planting or seeding for forestation or reforestation. Qualified timber property is property that contains trees in significant commercial quantities. See chapter 8 for more information on qualifying reforestation costs and qualified timber property.
If you elect to deduct qualified reforestation costs, create and maintain separate timber accounts for each qualified timber property and include all reforestation costs and the dates each was applied. Do not include this qualified timber property in any account (for example, depletion block) for which depletion is allowed.
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The unique stand identification numbers.
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The total number of acres reforested during the tax year.
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The nature of the reforestation treatments.
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The total amounts of qualified reforestation expenditures eligible to be amortized or deducted.
If you retire and remove a depreciable asset in connection with the installation or production of a replacement asset, you can deduct the costs of removing the retired asset. However, if you replace a component (part) of a depreciable asset, capitalize the removal costs if the replacement is an improvement and deduct the costs if the replacement is a repair.
The cost of an improvement to a business asset is normally a capital expense. However, you can elect to deduct the costs of making a facility or public transportation vehicle more accessible to and usable by those who are disabled or elderly. You must own or lease the facility or vehicle for use in connection with your trade or business.
A facility is all or any part of buildings, structures, equipment, roads, walks, parking lots, or similar real or personal property. A public transportation vehicle is a vehicle, such as a bus or railroad car, that provides transportation service to the public (including service for your customers, even if you are not in the business of providing transportation services).
You cannot deduct any costs that you paid or incurred to completely renovate or build a facility or public transportation vehicle or to replace depreciable property in the normal course of business.
Example.
John Duke's distributive share of ABC partnership's deductible expenses for the removal of architectural barriers was $14,000. John had $12,000 of similar expenses in his sole proprietorship. He elected to deduct $7,000 of them. John allocated the remaining $8,000 of the $15,000 limit to his share of ABC's expenses. John can add the excess $5,000 of his own expenses to the basis of the property used in his business. Also, if ABC can show that John could not deduct $6,000 ($14,000 - $8,000) of his share of the partnership's expenses because of how John applied the limit, ABC can add $6,000 to the basis of its property.
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Ground and floor surfaces.
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Walks.
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Parking lots.
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Ramps.
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Entrances.
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Doors and doorways.
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Stairs.
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Floors.
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Toilet rooms.
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Water fountains.
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Telephones.
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Elevators.
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Controls.
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Signage.
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Alarms.
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Protruding objects.
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Symbols of accessibility.
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Rail facilities.
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Buses.
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Rapid and light rail vehicles.
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The removed barrier must be a substantial barrier to access or use of a facility or public transportation vehicle by persons who have a disability or are elderly.
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The removed barrier must have been a barrier for at least one major group of persons who have a disability or are elderly (such as people who are blind, deaf, or wheelchair users).
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The barrier must be removed without creating any new barrier that significantly impairs access to or use of the facility or vehicle by a major group of persons who have a disability or are elderly.
Film and television production costs are generally capital expenses. However, you can elect to deduct costs paid or incurred for certain productions that begin after October 22, 2004. For more information, see section 181 of the Internal Revenue Code and Temporary Regulations sections 1.181-1T through 1.181-6T.
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