Choosing the election to capitalize can be tricky and even stressful at times. Electing to capitalize taxes, interest, and carrying charges isn’t as black and white of a decision as choosing to capitalize other long term assets. Some taxes and carrying charges that would normally be deducted currently or amortized may be capitalized if the taxpayer chooses to elect. For depreciable property, this has the effect of deferring the deduction to later years as depreciation. For non-depreciable property, such as unimproved real estate, the capitalized expenses increase basis and reduce gain (or increase loss) on a later sale of the property.
The capitalization election may be made:
- For taxes, mortgage interest and deductible carrying charges on unimproved and unproductive real property.
- By a taxpayer engaged in the development of real estate or the construction of an improvement to real estate, for the following items relating to the project: loan interest; taxes measured by compensation paid to employees and taxes imposed on the purchase of materials, or on the storage, use, or other consumption of materials; and other necessary charges, including fire insurance premiums.
- For interest on a loan to finance the purchase, transportation, and installation of machinery and other assets, state and local taxes imposed on the taxpayer, transportation, storage, use or other consumption of the property, and state and local taxes, including sales and use taxes and state and federal unemployment taxes, and the taxpayer’s share of federal social security taxes on wages of employees engaged in transportation and installation of the assets.
If you have any questions please reach out to your Henry & Horne professional tax adviser.
By Daniel Blackwell