[Code of Federal Regulations]
[Title 26, Volume 1]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.266-1]

[Page 569-571]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.266-1  Taxes and carrying charges chargeable to capital account 
and treated as capital items.

    (a)(1) In general. In accordance with section 266, items enumerated 
in paragraph (b)(1) of this section may be capitalized at the election 
of the taxpayer. Thus, taxes and carrying charges with respect to 
property of the type described in this section are chargeable to capital 
account at the election of the taxpayer, notwithstanding that they are 
otherwise expressly deductible under provisions of Subtitle A of the 
Code. No deduction is allowable for any items so treated.
    (2) See Sec. Sec. 1.263A-8 through 1.263A-15 for rules regarding 
the requirement to capitalize interest, that apply prior to the 
application of this section. After applying Sec. Sec. 1.263A-8 through 
1.263A-15, a taxpayer may elect to capitalize interest under section 266 
with respect to designated property within the meaning of Sec. 1.263A-
8(b), provided a computation under any provision of the Internal Revenue 
Code is not thereby materially distorted, including computations 
relating to the source of deductions.
    (b) Taxes and carrying charges. (1) The taxpayer may elect, as 
provided in paragraph (c) of this section, to treat the items enumerated 
in this subparagraph which are otherwise expressly deductible under the 
provisions of Subtitle A of the Code as chargeable to capital account 
either as a component of original cost or other basis, for the purposes 
of section 1012, or as an adjustment to basis, for the purposes of 
section 1016(a)(1). The items thus chargeable to capital account are:
    (i) In the case of unimproved and unproductive real property: Annual 
taxes, interest on a mortgage, and other carrying charges.
    (ii) In the case of real property, whether improved or unimproved 
and whether productive or unproductive:
    (a) Interest on a loan (but not theoretical interest of a taxpayer 
using his own funds),
    (b) Taxes of the owner of such real property measured by 
compensation paid to his employees,
    (c) Taxes of such owner imposed on the purchase of materials, or on 
the storage, use, or other consumption of materials, and
    (d) Other necessary expenditures, paid or incurred for the 
development of the real property or for the construction of an 
improvement or additional improvement to such real property, up

[[Page 570]]

to the time the development or construction work has been completed. The 
development or construction work with respect to which such items are 
incurred may relate to unimproved and unproductive real estate whether 
the construction work will make the property productive of income 
subject to tax (as in the case of a factory) or not (as in the case of a 
personal residence), or may relate to property already improved or 
productive (as in the case of a plant addition or improvement, such as 
the construction of another floor on a factory or the installation of 
insulation therein).
    (iii) In the case of personal property:
    (a) Taxes of an employer measured by compensation for services 
rendered in transporting machinery or other fixed assets to the plant or 
installing them therein,
    (b) Interest on a loan to purchase such property or to pay for 
transporting or installing the same, and
    (c) Taxes of the owner thereof imposed on the purchase of such 
property or on the storage, use, or other consumption of such property, 
paid or incurred up to the date of installation or the date when such 
property is first put into use by the taxpayer, whichever date is later.
    (iv) Any other taxes and carrying charges with respect to property, 
otherwise deductible, which in the opinion of the Commissioner are, 
under sound accounting principles, chargeable to capital account.
    (2) The sole effect of section 266 is to permit the items enumerated 
in subparagraph (1) of this paragraph to be chargeable to capital 
account notwithstanding that such items are otherwise expressly 
deductible under the provisions of Subtitle A of the Code. An item not 
otherwise deductible may not be capitalized under section 266.
    (3) In the absence of a provision in this section for treating a 
given item as a capital item, this section has no effect on the 
treatment otherwise accorded such item. Thus, items which are otherwise 
deductible are deductible notwithstanding the provisions of this 
section, and items which are otherwise treated as capital items are to 
be so treated. Similarly, an item not otherwise deductible is not made 
deductible by this section. Nor is the absence of a provision in this 
section for treating a given item as a capital item to be construed as 
withdrawing or modifying the right now given to the taxpayer under any 
other provisions of subtitle A of the Code, or of the regulations 
thereunder, to elect to capitalize or to deduct a given item.
    (c) Election to charge taxes and carrying charges to capital 
account. (1) If for any taxable year there are two or more items of the 
type described in paragraph (b)(1) of this section, which relate to the 
same project to which the election is applicable, the taxpayer may elect 
to capitalize any one or more of such items even though he does not 
elect to capitalize the remaining items or to capitalize items of the 
same type relating to other projects. However, if expenditures for 
several items of the same type are incurred with respect to a single 
project, the election to capitalize must, if exercised, be exercised as 
to all items of that type. For purposes of this section, a project 
means, in the case of items described in paragraph (b)(1)(ii) of this 
section, a particular development of, or construction of an improvement 
to, real property, and in the case of items described in paragraph 
(b)(1)(iii) of this section, the transportation and installation of 
machinery or other fixed assets.
    (2)(i) An election with respect to an item described in paragraph 
(b)(1)(i) of this section is effective only for the year for which it is 
made.
    (ii) An election with respect to an item described in:
    (a) Paragraph (b)(1)(ii) of this section is effective until the 
development or construction work described in that subdivision has been 
completed;
    (b) Paragraph (b)(1)(iii) of this section is effective until the 
later of either the date of installation of the property described in 
that subdivision, or the date when such property is first put into use 
by the taxpayer;
    (c) Paragraph (b)(1)(iv) of this section is effective as determined 
by the Commissioner.

Thus, an item chargeable to capital account under this section must 
continue to be capitalized for the entire period described in this 
subdivision applicable

[[Page 571]]

to such election although such period may consist of more than one 
taxable year.
    (3) If the taxpayer elects to capitalize an item or items under this 
section, such election shall be exercised by filing with the original 
return for the year for which the election is made a statement 
indicating the item or items (whether with respect to the same project 
or to different projects) which the taxpayer elects to treat as 
chargeable to capital account. Elections filed for taxable years 
beginning before January 1, 1954, and for taxable years ending before 
August 17, 1954, under section 24(a)(7) of the Internal Revenue Code of 
1939, and the regulations thereunder, shall have the same effect as if 
they were filed under this section. See section 7807(b)(2).
    (d) The following examples are illustrative of the application of 
the provisions of this section:

    Example 1. In 1956 and 1957 A pays annual taxes and interest on a 
mortgage on a piece of real property. During 1956, the property is 
vacant and unproductive, but throughout 1957 A operates the property as 
a parking lot. A may capitalize the taxes and mortgage interest paid in 
1956, but not the taxes and mortgage interest paid in 1957.
    Example 2. In February 1957, B began the erection of an office 
building for himself. B in 1957, in connection with the erection of the 
building, paid $6,000 social security taxes, which in his 1957 return he 
elected to capitalize. B must continue to capitalize the social security 
taxes paid in connection with the erection of the building until its 
completion.
    Example 3. Assume the same facts as in Example 2 except that in 
November 1957, B also begins to build a hotel. In 1957 B pays $3,000 
social security taxes in connection with the erection of the hotel. B's 
election to capitalize the social security taxes paid in erecting the 
office building started in February 1957 does not bind him to capitalize 
the social security taxes paid in erecting the hotel; he may deduct the 
$3,000 social security taxes paid in erecting the hotel.
    Example 4. In 1957, M Corporation began the erection of a building 
for itself, which will take three years to complete. M Corporation in 
1957 paid $4,000 social security taxes and $8,000 interest on a building 
loan in connection with this building. M Corporation may elect to 
capitalize the social security taxes although it deducts the interest 
charges.
    Example 5. C purchases machinery in 1957 for use in his factory. He 
pays social security taxes on the labor for transportation and 
installation of the machinery, as well as interest on a loan to obtain 
funds to pay for the machinery and for transportation and installation 
costs. C may capitalize either the social security taxes or the 
interest, or both, up to the date of installation or until the machinery 
is first put into use by him, whichever date is later.

    (e) Allocation. If any tax or carrying charge with respect to 
property is in part a type of item described in paragraph (b) of this 
section and in part a type of item or items with respect to which no 
election to treat as a capital item is given, a reasonable proportion of 
such tax or carrying charge, determined in the light of all the facts 
and circumstances in each case, shall be allocated to each item. The 
rule of this paragraph may be illustrated by the following example:

    Example. N Corporation, the owner of a factory in New York on which 
a new addition is under construction, in 1957 pays its general manager, 
B, a salary of $10,000 and also pays a New York State unemployment 
insurance tax of $81 on B's salary. B spends nine-tenths of his time in 
the general business of the firm and the remaining one-tenth in 
supervising the construction work. N Corporation treats as expenses 
$9,000 of B's salary, and charges the remaining $1,000 to capital 
account. N Corporation may elect to capitalize $8.10 of the $81 New York 
State unemployment insurance tax paid in 1957 since such tax is 
deductible under section 164.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 8584, 59 FR 67215, Dec. 29, 1994]