PMT, INC. - Page 32

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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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