IRS Publication 551 — Basis of Assets

T o capitalize means to include certain expenses in the basis of property you produce or in your inventory costs rather than deduct them as a current expense. You recover these costs through deductions for depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property.

Any cost you can't use to figure your taxable income for any tax year isn't subject to the uniform capitalization rules.

Example. If you incur a business meal expense for which your deduction would be limited to 50% of the cost of the meal, that amount is subject to the uniform capitalization rules. The nondeductible part of the cost isn't subject to the uniform capitalization rules. More information. For more information about these rules, see the regulations under section 263A of the Internal Revenue Code and Pub. 538, Accounting Periods and Methods.

Exceptions. For tax years beginning in 2025, you're not subject to the uniform capitalization rules if your average annual gross receipts are $31 million or less for the 3 preceding tax years and you're not a tax shelter. See section 263A(i).

Caution: The average annual gross receipts test threshold amount may be adjusted for inflation. Publication 551 may not be revised to reflect this amount. For tax years beginning after 2025, see the instructions for your applicable income tax return for the average annual gross receipts test threshold amount for the current tax year. The average annual gross receipts test threshold amount is also available at IRS.gov/Newsroom/Inflation-AdjustedT ax-Items-by- Tax- Year. Select the applicable tax year news release, then click the Revenue Procedure link to see the threshold amount under Limitation on Use of Cash Method of Accounting.

In addition, the following are not subject to the uniform capitalization rules.

• Property you produce that you don't use in your trade, business, or activity conducted for profit.

• Research and experimental expenses deductible under section 174 or 174A of the Internal Revenue Code.

• Qualified creative expenses you pay or incur as a freelance (self-employed) writer, photographer, or artist that are otherwise deductible on your tax return.

• Property you produce under a long-term contract, except for certain home construction contracts.

• Before 2018, costs for personal property acquired for resale if your (or your predecessor's) average annual gross receipts for the 3 previous tax years don't exceed $10 million. For other exceptions to the uniform capitalization rules, see section 1.263A-1(b) of the regulations. For information on the special rules that apply to costs incurred in the business of farming, see chapter 6 in Pub. 225, Farmer's Tax Guide.

Intangible Assets Intangible assets include goodwill, patents, copyrights, trademarks, trade names, and franchises. The basis of an intangible asset is usually the cost to buy or create it. If you acquire multiple assets, for example, an ongoing business for a lump sum, see Allocating the Basis, later, to figure the basis of the individual assets. The basis of certain intangibles can be amortized. See the instructions for Form 4562 for information on the amortization of these costs.

Patents. The basis of a patent you get for an invention is the cost of development, such as research and experimental expenditures, drawings, working models, and attorneys' and governmental fees. If you deduct the research and experimental expenditures as current business expenses, you can't include them in the basis of the patent. The value of the inventor's time spent on an invention isn't part of the basis. Copyrights. If you're an author, the basis of a copyright will usually be the cost of getting the copyright plus copyright fees, attorneys' fees, clerical assistance, and the cost of plates that remain in your possession. Don't include the value of your time as the author, or any other person's time you didn't pay for.

Franchises, trademarks, and trade names. If you buy a franchise, trademark, or trade name, the basis is its cost, unless you can deduct your payments as a business expense. Allocating the Basis If you buy multiple assets for a lump sum, allocate the amount you pay among the assets you receive. You must make this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. See Trade or Business Acquired below. Group of Assets Acquired If you buy multiple assets for a lump sum, you and the seller may agree to a specific allocation of the purchase price among the assets in the sales contract. If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation will generally be accepted. However, see Trade or Business Acquired next. Trade or Business Acquired If you acquire a trade or business, allocate the consideration paid to the various assets acquired. Generally, reduce the consideration paid by any cash and general deposit accounts (including checking and savings accounts) received. Allocate the remaining consideration to the other business assets received in proportion to (but not more than) their FMV in the following order.

Publication 551 (12-2025) 5