There are two exceptions allowed for small business residential contractors to escape the requirements of Section 263(a) – Capitalization of Overhead. The first is the $10,000,000 in sales per year threshold. The second exception is allowed for contractors that build residential homes and are able to complete the contract within two years.
Capitalization of Overhead
Section 263(a) of the Internal Revenue Code mandates capitalization of overhead for contractors with more than $10 Million a year in sales; there is an exclusion for certain home builders. Capitalization of overhead refers to temporarily posting indirect costs of construction as an asset on the balance sheet and expensing this asset in accordance with actual production.