Capitalization of Overhead in Construction – Section 263(a)
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There is a lot of confusion related to the capitalization of overhead in construction, specifically as it relates to the requirements of Section 263(a) of the Internal Revenue Code. This article is designed to transition the owner/manager of a small construction company from having a novice understanding or no understanding into a more sophisticated and aware small business entrepreneur. To help you gain more knowledge about this subject, I will first explain what capitalization of overhead means and why it makes sense (believe it or not, it actually is understandable and makes a lot of sense; yeah I know, I’m an accountant so this stuff is weird and accountants love weird math). Next, I’m going to explain Section 263(a) of the Code and how it applies to the small business contractor. In most cases, it will not apply to you but it is important to understand why and when it is applicable.
Capitalization of Overhead (Meaning)
The average business entrepreneur will define costs of construction as land, materials, labor, subcontractors and equipment used to construct the improvements. In reality, there is much more. Accountants, bankers and governmental compliance agencies commonly refer to the above costs as ‘Direct’ costs. Basically,
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