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.
Section 263(a) of the Internal Revenue Code deals with capital expenditures related to real estate and the corresponding improvements. In general any purchase for real estate that has some future benefit to the business is capitalized and not expendable in the current tax year.
The Internal Revenue Service uses a complex definition to identify capital expenditures (assets). A capital expenditure is not deductible as an expense in the tax year purchased; the taxpayer or entity must use depreciation, amortization or depletion to obtain deductible value on the entity’s return.