J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Uniform Capitalization Rules

Regardless of your method of accounting, special tax rules limit your ability to claim a current deduction for certain expenses. These are called the uniform capitalization rules, referred to as the UNICAP rules for short. The uniform capitalization rules are a form of accounting method that operates in coordination with the accrual method, but overrides it. In essence, these rules require you to add to the cost of property certain expenses—instead of currently deducting them. The cost of these expenses, in effect, are recovered through depreciation or amortization, or as part of the costs of goods sold when you use, sell, or otherwise dispose of the property. The uniform capitalization rules are complex. Important things to recognize are whether you may be subject to them and that expenses discussed throughout this book may not be currently deductible because of the application of the uniform capitalization rules.

Capitalization Required

Unless 1 of the exceptions is applicable, you must use the uniform capitalization rules and add certain expenses to the basis of property if you:

• Produce real property or tangible personal property for use in your business or for sale to customers (producers), or
• Acquire property for resale (resellers).

EXCEPTIONS TO THE UNICAP RULES

There are many exceptions to the uniform capitalization rules. Small businesses may be able to escape application of the uniform capitalization rules by relying on 1 of these exceptions. ...