Capitalized Premiums(p20)

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 premiums for insurance on your plant or facility, machinery, equipment, materials, property produced, or property acquired for resale.

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

However, 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 for the 3 prior tax years.
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 on these rules, see Uniform Capitalization Rules in Publication 538 and the regulations under Internal Revenue Code section 263A.