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Cash method. If you use the cash method of accounting, you generally deduct insurance premiums in the tax year you actually paid them, even if you incurred them in an earlier year. However, see Prepayment, later. Accrual method. If you use an accrual method of accounting, you can't deduct insurance pre- miums before the tax year in which you incur a liability for them. In addition, you can't deduct insurance premiums before the tax year in which you actually pay them (unless the excep- tion for recurring items applies). For more infor- mation about the accrual method of accounting, see chapter 1. For information about the excep- tion for recurring items, see Pub. 538. Prepayment. You can't deduct expenses in advance, even if you pay them in advance. This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Expenses such as insurance are generally allocable to a period of time. You can deduct in- surance expenses for the year to which they are allocable. Example. In 2018, you signed a 3-year in- surance contract. Even though you paid the premiums for 2018, 2019, and 2020 when you signed the contract, you can only deduct the premium for 2018 on your 2018 tax return. You can deduct in 2019 and 2020 the premium allo- cable to those years. Dividends received. If you receive dividends from business insurance and you deducted the premiums in prior years, at least part of the divi- dends generally are income. For more informa- tion, see Recovery of amount deducted (tax benefit rule) in chapter 1 under How Much Can I Deduct. 7. Costs You Can Deduct or Capitalize What’s New Alternative minimum tax (AMT). For tax years beginning after 2017, the Tax Cuts and Jobs Act, section 12001, repealed the corpo- rate AMT. Introduction This chapter discusses costs you can elect to deduct or capitalize. You generally deduct a cost as a current business expense by subtracting it from your in- come in either the year you incur it or the year you pay it. If you capitalize a cost, you may be able to recover it over a period of years through peri- odic deductions for amortization, depletion, or depreciation. When you capitalize a cost, you add it to the basis of property to which it relates. A partnership, corporation, estate, or trust makes the election to deduct or capitalize the costs discussed in this chapter except for ex- ploration costs for mineral deposits. Each indi- vidual partner, shareholder, or beneficiary elects whether to deduct or capitalize explora- tion costs. You may be subject to AMT if you de- duct certain research and experimen- tal, intangible drilling, exploration, de- velopment, circulation, or business organizational costs. For more information on the AMT, see the Instructions for Form 6251, Alternative Mini- mum Tax—Individuals. Topics This chapter discusses: • Carrying charges • Research and experimental costs • Intangible drilling costs • Exploration costs • Development costs • Circulation costs • Business start-up and organizational costs • Reforestation costs • Retired asset removal costs • Barrier removal costs • Film and television production costs • Repair and maintenance costs Useful Items You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) Schedule C (Form 1040) Profit or Loss From Business (Sole Proprietorship) 3468 Investment Credit 6765 Credit for Increasing Research Activities 8826 Disabled Access Credit T (Timber) Forest Activities Schedule See chapter 13 for information about getting publications and forms. Carrying Charges Carrying charges include the taxes and interest you pay to carry or develop real property or to carry, transport, or install personal property. Certain carrying charges must be capitalized under the uniform capitalization rules. (For infor- mation on capitalization of interest, see CAUTION ! 544 Schedule C (Form 1040) 3468 6765 8826 T (Timber) chapter 4.) You can elect to capitalize carrying charges not subject to the uniform capitalization rules, but only if they are otherwise deductible. You can elect to capitalize carrying charges separately for each project you have and for each type of carrying charge. Your election is good for only 1 year for unimproved and unpro- ductive real property. You must decide whether to capitalize carrying charges each year the property remains unimproved and unproduc- tive. For other real property, your election to capitalize carrying charges remains in effect un- til construction or development is completed. For personal property, your election is effective until the date you install or first use it, whichever is later. How to make the election. To make the elec- tion to capitalize a carrying charge, attach a statement to your original tax return for the year the election is to be effective indicating which charges you are electing to capitalize. However, if you timely filed your return for the year without making the election, you can still make the elec- tion by filing an amended return within 6 months of the due date of the return (excluding exten- sions). Attach the statement to the amended re- turn and write “Filed pursuant to section 301.9100-2” on the statement. File the amen- ded return at the same address you filed the original return. Research and Experimental Costs The costs of research and experimentation are generally capital expenses. However, you can elect to deduct these costs as a current busi- ness expense. Your election to deduct these costs is binding for the year it is made and for all later years unless you get IRS approval to make a change. If you meet certain requirements, you may elect to defer and amortize research and exper- imental costs. For information on electing to de- fer and amortize these costs, see Research and Experimental Costs in chapter 8. Research and experimental costs defined. Research and experimental costs are reasona- ble costs you incur in your trade or business for activities intended to provide information that would eliminate uncertainty about the develop- ment or improvement of a product. Uncertainty exists if the information available to you does not establish how to develop or improve a prod- uct or the appropriate design of a product. Whether costs qualify as research and experi- mental costs depends on the nature of the ac- tivity to which the costs relate rather than on the nature of the product or improvement being de- veloped or the level of technological advance- ment. The costs of obtaining a patent, including at- torneys' fees paid or incurred in making and perfecting a patent application, are research and experimental costs. However, costs paid or incurred to obtain another's patent are not re- search and experimental costs. Page 24 Chapter 7 Costs You Can Deduct or Capitalize