Section 263A (UNICAP) — Glossary — IRS Depreciation Rules

Section 263A (UNICAP)

The Uniform Capitalization rules of IRC §263A. Requires capitalization of direct costs and a properly allocable share of indirect costs to (a) property produced by the taxpayer and (b) real or personal property acquired by the taxpayer for resale. §263A interacts with cost segregation for self-constructed and improved real property.

STATUTE BASIS · IRC §263A · Treas. Reg. §1.263A-1 through §1.263A-15

In context

§263A was enacted as part of the Tax Reform Act of 1986 to standardize what producers and resellers must capitalize. For real estate, the practical impact is on self-constructed property: a developer who builds a rental building must capitalize not only direct construction costs but a properly allocable share of indirect costs (interest during construction, supervision, certain overhead).

The most-litigated §263A issue in real-estate cost segregation is the treatment of interest under §263A(f) — the interest-capitalization rule for property with a long production period. Interest incurred during construction is generally capitalized to the building’s basis rather than deducted in the year incurred.

§263A interacts with cost segregation downstream: properly capitalized soft costs flow into the depreciable basis that a cost segregation study then partitions across MACRS classes. Mis-capitalized soft costs are a recurring audit exposure.

Small-business taxpayers with average annual gross receipts at or below the §448(c) threshold are exempt from §263A under IRC §263A(i).

See basis and depreciable basis.