Under the uniform capitalization rules, you have to capitalize the direct costs and part of the indirect costs for production or resale activities.

Generally, you are subject to the uniform capitalization rules if you do any of the following in the course of a trade or business or an activity carried on for profit.

• Produce real or tangible personal property for use in the business or activity.
• Produce real or tangible personal property for sale to customers.
• Acquire property for resale. However, this rule does not apply to personal property if your average annual gross receipts for the 3 previous tax years were not more than $10 million.

Indirect costs include amounts incurred for renting or leasing equipment, facilities, or land.

Example 1. You rent construction equipment to build a storage facility. You must capitalize as part of the cost of the building the rent you paid for the equipment. You recover your cost by claiming a deduction for depreciation on the building.

Example 2. You rent space in a facility to conduct your business of manufacturing tools. You must include the rent you paid to occupy the facility in the cost of the tools you produce.

More information. For more information, see the regulations under section 263A of the Internal Revenue Code.

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