Hello, I'm David Hardesty. In this lecture, we continue our discussion of website development costs with a detailed look at how to identify and differentiate between section 263 costs and section 162 costs. Before studying this lecture, please first study two other lectures: lecture 2-1 overview of accounting for website development costs and lecture 2-2 accounting for software costs in websites. The objectives of this lecture are to understand the basic rules for characterizing website development costs as currently deductible section 162 ordinary and necessary business expenses, understand the basic rules for characterizing website development costs as section 263 capitalized costs, and understand the manner in which the intangibles regulations control characterization of costs associated with intangibles as either section 162 or 263 costs. The reading in the text associated with this lecture is at electronic commerce taxation and planning 7.03. Let's first discuss section 162 expenditures as discussed in the text at 7.03. The code allows a current deduction for section 162 expenses. To qualify as deductible under Section 162, costs must be ordinary and necessary costs incurred in carrying on a trade or business and not subject to special treatment under other code sections such as sections 163, 164, 174, 263, and so on. What this means for practical purposes is any costs incurred in carrying on a business which are not subject to the requirements of other specific code sections often default to section 162 classification. Website costs that are not capitalized under Section 263, and are ordinarily not subject to sections 163, 164, or 174, are often characterized as section 162 costs. Note: It is important to remember that section 162 expenses of a startup company, which are otherwise currently deductible, are deferred under Section 195. Now, let's switch to section 263 costs. The code requires a taxpayer to capitalize section...
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263a Form: What You Should Know
They generally must capitalize the expenses reported on Form 1099-MISC. Any cost deducted in the prior year may not be taken into account in figuring the cost of producing and using that particular property. Taxpayers may use the same method that section 263A requires for calculating and capitalizing the expenses; however, under section 263A, taxpayers should apply the following rules to determine whether to capitalize or not to capitalize the costs. Direct Cost Caps the direct labor cost Eliminates all expenses that are not allocable to capital investments Loss to the extent of any allowable compensation or expense (i.e., an adjustment to capital accounts) Eliminates the cost of any additional property or services produced on a subsequent year's production basis If capitalization was not previously applied to the cost of a production activity, then any allowable compensation received from the employer during the tax year should be considered to be part of the direct cost of the production activity. No allowance can be allowed for any compensation received after the tax year. Any property that is added to or taken from the inventory during the tax year should be included on the inventory by counting the cost of those items as a capital expense. If capitalization is not yet applied, then the amount of the inventory as of the close of the tax year should be used to determine the cost to the taxpayer of producing and using the inventory. Cost to the taxpayer of producing and using production property, when the inventory was used to produce tangible personal property of a nonrecognizable character, such as building permits, should be capitalized at a rate no more than twice the rate of depreciation for the type of property that was produced. In the case of inventory, a depreciation rate of 15% may be used for inventory made of inventory material. A cost reduction to the taxpayer that results in any property that was produced being used in the production activity instead of discarded or destroyed, or in any way being put to a lesser use, is not treated as capital expense but as a depreciation deduction. If the taxpayer does use the property in carrying on the related production activity, then the cost reduction should be capitalized. Capitalization may only apply after accounting for the allowance for compensation received from the employer during the tax year.
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