Category: Accounting Periods
and Methods Copyright 1998, The Tax Resource Group. All
rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Background Taxpayer, an individual, purchased a commercial building (formerly a bar). Taxpayer intends to renovate the building then lease it to his controlled corporation. During the renovation process, the taxpayer incurs interest expense and property taxes related to ownership of the building. Issue Are these amounts subject to the uniform cost capitalization rules? Answer Yes, the costs are clearly subject to UNICAP.. Discussion The UNICAP rules apply to real or personal property produced by the taxpayer and to property purchased for resale. Section 263A(b). The term "produce" includes construct, build, install, manufacture, develop, or improve. Section 263A(g)(1). The UNICAP rules clearly apply to property a taxpayer produces for his own use. It seems clear that what the taxpayer is doing in this case--renovating a building--would fall under the definition of production as set forth at Section 263A(g)(1). On the other hand, what if the taxpayer is not engaged in a trade or business? Do the UNICAP rules to apply to an activity engaged in for profit that does not rise to the level of a trade or business? The General Explanation of The Tax Reform Act of 1986 (the Blue Book) and the preamble to Reg. Sec. 1.263A-1 (T.D. 8131, 3/30/87) make it clear that the scope of the UNICAP rules includes activities engaged in for profit. It is not necessary to have a trade or business in order to have an obligation to capitalize costs under the UNICAP rules. |
