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Publication 535

Capitalizing Rent Expenses(p12)

Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property.
Indirect costs include amounts incurred for renting or leasing equipment, facilities, or land.

Uniform capitalization rules.(p12)

You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit.
  1. Produce real property or tangible personal property.
  2. Acquire property for resale. However, this rule does not apply to personal property if your average annual gross receipts are $10 million or less.
Producing property.(p12)
You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow the property. Property produced for you under a contract is treated as produced by you to the extent you make payments or otherwise incur costs in connection with the property.

Example 1.(p12)

You rent construction equipment to build a storage facility. If you are subject to the uniform capitalization rules, 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.(p12)

You rent space in a facility to conduct your business of manufacturing tools. If you are subject to the uniform capitalization rules, you must include the rent you paid to occupy the facility in the cost of the tools you produce.

More information.(p12)

For exceptions and more information on these rules, see Uniform Capitalization Rules in Pub. 538 and the regulations under section 263A.