Cal. Code Regs. tit. 18 § 24426(a)

Current through Register 2024 Notice Reg. No. 52, December 27, 2024

Section 24426(a) - Taxes and Carrying Charges Chargeable to Capital Account and Treated as Capital Items

(1) In General. In accordance with Section 24426, items enumerated in subsection (2)(A) of this regulation may be capitalized at the election of the taxpayer. Thus, taxes and carrying charges with respect to property of the type described in this regulation are chargeable to capital account at the election of the taxpayer, notwithstanding that they are otherwise expressly deductible under provisions of Article 1 of Chapter 7. No deduction is allowable for any items so treated.

(2) Taxes and Carrying Charges.

(A) The taxpayer may elect, as provided in subsection (3) of this regulation, to treat the items enumerated in this paragraph which are otherwise expressly deductible under the provisions of Article 1 of Chapter 7 as chargeable to capital accounts as a component of original cost or other basis, for the purposes of Section 24912, or as an adjustment to basis, for the purposes of Section 24916. 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:

(I) Interest on a loan (but not theoretical interest of a taxpayer using its own funds),

(II) Taxes of the owner of such real property measured by compensation paid to its employees.

(III) Taxes of such owner imposed on the purchase of materials, or on the storage, use, or other consumption of materials, and

(IV) 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 to the time the development or to such real property, up 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:

(I) Taxes of an employer measured by compensation for services rendered in transporting machinery or other fixed assets to the plant or installing them therein.

(II) Interest on a loan to purchase such property or to pay for transporting or installing the same and

(III) Taxes of the owner thereof imposed on the purchase of such property or on the storage, use, or other purchase of such property in the state which is purchased for storage, use or other consumption in that state 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 Franchise Tax Board are, under sound accounting principles, chargeable to capital account.

(B) The sole effect of Section 24426 is to permit the items enumerated in paragraph (A) of this subsection to be chargeable to capital account notwithstanding that such items are otherwise expressly deductible under the provisions of these part. An item not otherwise deductible may not be capitalized under Section 24426.

(C) In the absence of a provision in this regulation for treating a given item as a capital item, this regulation has no effect on the treatment otherwise accorded such item. Thus, items which are otherwise deductible are deductible notwithstanding the provisions of these regulation, 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 regulation. Nor is the absence of a provision in this regulation 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 Article 1 of Chapter 7, or of the regulations thereunder, to elect to capitalize or to deduct a given item.

(3) Election to Charge Taxes and Carrying Charges to Capital Account.

(A) If for any income year there are two or more items of the type described in subsection (2) (A) of this regulation, 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 it 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 some 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 regulation, a "project" means, in the case of items described in subsection (2) (A) (ii) of this regulation, a particular development of, or construction of an improvement to, real property, and in the case of items described in subsection (2) (A) (iii) of this regulation, the transportation and installation of machinery or other fixed assets.

(B)

(i) An election with respect to an item described in subsection (2) (A) (i) of this regulation is effective only for the year for which it is made.

(ii) An election with respect to an item described in-

(I) Subsection (2) (A) (ii) of this regulation is effective until the development or construction work described in that subparagraph has been completed;

(II) Subsection (2) (A) (iii) of this regulation is effective until the later of either the date of installation of the property described in that subparagraph, or the date when such property is first put into use by the taxpayer;

(III) Subsection (2)(A)(iv) of this regulation is effective as determined by the Franchise Tax Board. Thus, an item chargeable to capital account under this regulation must continue to be capitalized for the entire period described in this subparagraph applicable to such election although such period may consist of more than one income year.

(C) If the taxpayer elects to capitalize an item or items under this regulation, 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 income years beginning before January 1, 1955, and for income years ending before June 6, 1955, under Section 24201(d)(2) of the Bank and Corporation Tax Law of 1954, and the regulations thereunder, shall have the same effect as if they were filed under this regulation.

(4) The following examples are illustrative of the application of the provisions of this regulation:

EXAMPLE (1).

In 1956 and 1957 taxpayer 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, taxpayer B began the erection of an office building for itself. B in 1957, in connection with the erection of the building, paid $6,000 social security taxes, which in its 1957 return it 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 it to capitalize the social security taxes paid in erecting the hotel; it 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).

Taxpayer C purchases machinery in 1957 for use in its factory. It 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 it, whichever date is later.

(5) Allocation. If any tax or carrying charge with respect to property is in part a type of item described in subsection (2) of this regulation 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 subsection 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 24345.

Cal. Code Regs. Tit. 18, § 24426(a)

1. New section filed 12-22-69; effective thirtieth day thereafter (Register 69, No. 52).[FN**]
This regulation is substantially the same as Section 26 CFR 1.266-1.

Note: Authority cited: Section 26422, Revenue and Taxation Code.

1. New section filed 12-22-69; effective thirtieth day thereafter (Register 69, No. 52).