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direct and indirect costs (including taxes) properly allocable to
real and tangible property produced by a taxpayer. "Produced
property" includes both property that is sold to customers
(inventory) and property that is used in a taxpayer's trade or
business (self-constructed assets). Sec. 263A(g)(1). Section
1.263A-1T(b), Temporary Income Tax Regs., 52 Fed. Reg. 10061-
10062 (Mar. 30, 1987), provides that direct material and labor
costs must be capitalized with respect to production activities.
Further, all indirect costs that directly benefit or are incurred
by reason of the performance of a production activity must be
capitalized. Sec. 1.263A-1T(b)(2)(ii), Temporary Income Tax
Regs., 52 Fed. Reg. 10062 (Mar. 30, 1987). Property produced for
the taxpayer under a contract with another is treated as property
produced by the taxpayer to the extent that the taxpayer makes
payments or otherwise incurs costs with respect to such property.
Sec. 1.263A-1T(a)(5)(ii), Temporary Income Tax Regs., 52 Fed.
Reg. 10061 (Mar. 30, 1987).
"Direct material costs" include the cost of those materials
that become an integral part of the subject matter and the cost
of those materials that are consumed in the ordinary course of
the activity. "Direct labor costs" include the cost of labor
which can be identified or associated with a particular activity.
Sec. 1.263A-1T(b)(2), Temporary Income Tax Regs., 52 Fed. Reg.
10062 (Mar. 30, 1987). "Indirect costs" include those costs that
directly benefit or are incurred by reason of the performance of
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