2B — March 29 - April 11, 2019 — Owners, Developers & Managers — M id A tlantic
Real Estate Journal
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O wners , D evelopers & M anagers By Michael D. Yarrow, WithumSmith+Brown Real EstateDevelopment –When to Expense vs Capitalize Costs O ne question real es- tate developers are faced with is when
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of the Tax Cuts and Jobs Act (“TCJA”), additional analysis may be required to determine the appropri- ate recognition of costs, depending on whether the taxpayer is considered a large business taxpayer or a small business taxpayer. As part of the TCJA, the threshold in determining whether small business tax- payers meet the exception for following capitalization guidelines under Section 263A was increased to $25 million. This provides an opportunity for those small business tax- payers to potentially deduct certain indirect expenses re- lated to the production of real property in the year the deductions are incurred. In determining whether a tax-
threshold, only costs directly associated with the production of real property are required to be capitalized. Other costs such as interest, real estate taxes and insurance may be expensed as incurred and not capitalized in the basis of the real property. If the entity now meets this exception threshold as a small business taxpayer (and previously did not under the prior regulations), the taxpayer is required to file Form 3115 to elect a change in accounting method to apply these regulations. If a taxpayer does not file for the change in accounting method it will be required to capitalize costs as continued on page 18B
payer is considered a small business taxpayer, it must meet the gross receipts test under Section 448(c) and not be considered a tax shelter. The gross receipts test under Section 448(c) is met if the tax- payer’s average annual gross receipts for the past three taxable years does not exceed $25 million (this amount is ad- justed for inflation). However, when performing this calcula- tion under Section 448(c), the taxpayer must consider the aggregation rules and include other entities that meet those rules in determining the gross receipts figure. If an entity is under the $25 million gross receipts
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