Capitalization Requirements

Overall, the new final regulations restate in a comprehensive way long-established concepts about which costs must be capitalized in connection with the acquisition or production of real or personal property. Under the new regulations, as a general rule, all costs that facilitate the acquisition or production of such property must be capitalized, with exceptions for employee compensation and overhead costs. Investigatory expenses related to the acquisition of realty generally do not have to be capitalized unless the expenses are “inherently facilitative.” And the final regulations require taxpayers to capitalize repairs made to assets before they are placed in service. Under the final regulations, unless the expense qualifies as a material or supply, or the de minimis safe harbor election applies, a taxpayer must capitalize amounts paid to acquire or produce a unit of property (UOP), whether real or personal property, including leasehold improvement property, land and land improvements, buildings, machinery and equipment, and furniture and fixtures. Amounts paid to acquire or produce a unit of real or personal property include the invoice price and transaction costs.

The term “unit of property” is defined in general, as all the components that are functionally interdependent (i.e., where one component’s placement in service by the taxpayer is dependent on the placement in service of another component by the taxpayer) comprise a single UOP. The taxpayer also must capitalize costs for work performed before the date that the UOP is placed in service by the taxpayer.

These capitalization rules generally apply to tax years beginning on or after January 1, 2014.