Uniform Capitalization Rules

Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for 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.

Activities subject to the rules.   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.

• Produce real or tangible personal property. For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property.
• Acquire property for resale.

Exceptions.   These rules do not apply to the following property.

1. Personal property you acquire for resale if your average annual gross receipts are $10 million or less.
2. Property you produce if you meet either of the following conditions.
   1. Your indirect costs of producing the property are $200,000 or less.
   2. You use the cash method of accounting and do not account for inventories. For more information, see Inventories, earlier.

Special Methods

There are special methods of accounting for certain items of income or expense. These include the following.

• Amortization, discussed in chapter 9 of Publication 535, Business Expenses.
• Bad debts, discussed in chapter 11 of Publication 535.
• Depletion, discussed in chapter 10 of Publication 535.
• Depreciation, discussed in Publication 946, How To Depreciate Property.
• Installment sales, discussed in Publication 537, Installment Sales.

Change in Accounting Method

Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. A change in your accounting method includes a change in:

1. Your overall method, such as from cash to an accrual method, and
2. Your treatment of any material item.

To get approval, you must file Form 3115, Application for Change in Accounting Method. You may have to pay a fee. For more information, see the form instructions.

Automatic change procedures.   These are procedures under which certain taxpayers can presume to have IRS approval to change their method of accounting. The approval is granted for the tax year for which the taxpayer requests a change (year of change), if the taxpayer complies with the provisions of the automatic change procedures. No user fee is required for an application filed under an automatic change procedure.

Generally, you must use Form 3115 to request an automatic change. See the form instructions and Revenue Procedure 2002-9, as modified by Revenue Procedure 2002-19, Revenue Procedure 2002-28, and Revenue Procedure 2002-54, and Announcement 2002-17, (or any successor), for more information. Revenue Procedure 2002-9 is in Internal Revenue Bulletin 2002-3, Revenue Procedure 2002-19 is in Internal Revenue Bulletin 2002-13, Revenue Procedure 2002-28 is in Internal Revenue Bulletin 2002-18, Revenue Procedure 2002-54 is in Internal Revenue Bulletin 2002-35, and Announcement 2002-17 is in Internal Revenue Bulletin 2002-8.

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