8160 / How do the capitalization rules of IRC Section 263A apply to work performed by authors, photographers, and artists?

Section 263A contains the “uniform capitalization rules,” and generally provides that the direct and indirect costs of producing tangible personal property must be capitalized rather than expensed in the current tax year. For purposes of determining whether a taxpayer producing intellectual or creative property is subject to Section 263A, the regulations provide that “tangible personal property” includes films, sound recordings, video tapes, books, and other “similar property.” “Similar property” embodies words, ideas, concepts, images, or sounds created by the creator.¹ For example, the costs of producing and developing books that are required to be capitalized include costs incurred by an author in researching, preparing, and writing the book.²

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Planning Point: Certain ordinary business expenses are generally currently deductible and not subject to the capitalization rules. These include marketing, selling, advertising, and distribution. These expenses should be separately itemized in invoices and for contracts to demonstrate their current deductibility.

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A critical exemption from the capitalization rules exists for individuals engaged in a trade or business of being a writer, photographer, or artist. Under Section 263A(h), “qualified creative expenses” are not required to be capitalized, and may be currently deductible. “Qualified creative expenses” include expenses paid or incurred by an individual in the trade or business of being a writer, photographer, or artist, which would otherwise be allowable as a deduction but for Section 263A.³ Qualified creative expenses do not include expenses relating to printing, photographic plates, motion picture films, videotapes or “similar items.”

See Q for a discussion of the 2017 Tax Act impact on the tax treatment upon disposition of certain self-created intellectual property.