Rule2025-19279
Interest Capitalization Requirements for Improvements That Constitute Designated Property
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 2, 2025
Effective
October 2, 2025
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains final regulations that, with regard to the interest capitalization requirements for improvements constituting designated property, remove the associated property rule and similar rules from the existing regulations. In addition, this document contains final regulations that modify the definition of "improvement" for purposes of applying those existing regulations. Lastly, this document contains final regulations that modify other rules in those existing regulations in light of the removal of the associated property rule. The final regulations affect taxpayers making improvements to real or tangible personal property that constitute the production of designated property.
Full Text
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<title>Federal Register, Volume 90 Issue 189 (Thursday, October 2, 2025)</title>
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[Federal Register Volume 90, Number 189 (Thursday, October 2, 2025)]
[Rules and Regulations]
[Pages 47581-47583]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-19279]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 10034]
RIN 1545-BN93
Interest Capitalization Requirements for Improvements That
Constitute Designated Property
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final rule.
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SUMMARY: This document contains final regulations that, with regard to
the interest capitalization requirements for improvements constituting
designated property, remove the associated property rule and similar
rules from the existing regulations. In addition, this document
contains final regulations that modify the definition of
``improvement'' for purposes of applying those existing regulations.
Lastly, this document contains final regulations that modify other
rules in those existing regulations in light of the removal of the
associated property rule. The final regulations affect taxpayers making
improvements to real or tangible personal property that constitute the
production of designated property.
DATES:
Effective date: These regulations are effective on October 2, 2025.
Applicability date: For the applicability date, see Sec. 1.263A-
15(a)(6).
FOR FURTHER INFORMATION CONTACT: Elizabeth Boone or Max Fishman of the
Office of the Associate Chief Counsel (Income Tax and Accounting) at
(202) 317-7007 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Authority
This document amends the regulations under section 263A(f) of the
Internal Revenue Code (Code) regarding the interest capitalization
requirements for improvements that constitute the production of
designated property under Sec. 1.263A-8 (final regulations). The final
regulations are issued under the express delegation of authority to the
Secretary of the Treasury or the Secretary's delegate (Secretary) under
section 263A(j), which provides, in part, that ``[t]he Secretary shall
prescribe such regulations as may be necessary or appropriate to carry
out the purposes of [section 263A].'' The final regulations are also
issued under the express delegation of authority to the Secretary under
section 7805(a) of the Code, which provides that ``the Secretary shall
prescribe all needful rules and regulations for the enforcement of [the
Code], including all rules and regulations as may be necessary by
reason of any alteration of law in relation to internal revenue.''
Background and Summary of Comments
On May 15, 2024, the Department of the Treasury (Treasury
Department) and the IRS published in the Federal Register (89 FR 42404)
a notice of proposed rulemaking (REG-133850-13) proposing amendments to
regulations under 26 CFR part 1 (proposed regulations). The proposed
regulations would remove the ``associated property rule'' and similar
rules in Sec. 1.263A-11(e) from the interest capitalization
requirements for improvements that constitute the production of
designated property under section 263A(f) and Sec. 1.263A-8(d)(3). In
addition, the proposed regulations would modify the mid-production
purchases rule of Sec. 1.263A-11(f) to clarify that the rule applies
only to property purchased and further produced before it is placed in
service. Finally, the proposed regulations would amend Sec. 1.263A-
8(d)(3) to update the definition of ``improvement'' so that it is
consistent with the definition of ``improvement'' in Sec. 1.263(a)-3,
including the exceptions, safe harbors, and elections provided under
Sec. 1.263(a)-3.
On July 24, 2024, the Treasury Department and the IRS published a
correction to the proposed regulations in the Federal Register (89 FR
59864) to amend a citation error in the preamble of REG-133850-13. No
public hearing was requested or held on the proposed regulations.
The Treasury Department and the IRS received two comments in
response to the notice of proposed rulemaking. Both comments are
available at <a href="https://www.regulations.gov">https://www.regulations.gov</a> or upon request. The first
comment did not address the proposed regulations. The second comment
expressed support for the proposed regulations without suggesting any
modifications to the proposed regulations. Accordingly, this Treasury
Decision adopts the proposed regulations as final regulations with only
minor, clarifying changes. Specifically, the final regulations make
minor changes to proposed Sec. 1.263A-8(d)(3)(i) to clarify the scope
of improvements that constitute the ``production of property'' for
purposes of determining whether any such improvement is designated
property under Sec. 1.263A-8.
Special Analyses
I. Regulatory Planning and Review
The Office of Management and Budget's Office of Information and
Regulatory Analysis has determined that the final regulations are not
significant and are not subject to review under section 6(b) of
Executive Order 12866. Therefore, a regulatory impact assessment is not
required.
II. Paperwork Reduction Act
1. Collections of Information
These final regulations do not impose additional recordkeeping or
reporting burden related to section 263A for taxpayers. A change in a
taxpayer's treatment of interest to a method consistent with Sec. Sec.
1.263A-8(d)(3) and 1.263A-11(e) and (f), as applicable, is a change in
method of accounting to which sections 446 and 481 of the Code apply.
Taxpayers change methods of accounting by filing Form 3115, Application
for Change in Accounting Method (Office of Management and Budget 1545-
2070). For purposes of the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)) (PRA), the reporting
[[Page 47582]]
burden associated with Form 3115 will be reflected in the PRA
submission for Form 3115 (OMB 1545-2070).
2. Burden Estimates
These final regulations impose 0 hours and $0 of additional
recordkeeping or reporting burden related to section 263A for
taxpayers. Taxpayers who change their accounting method based on the
revised requirements do so by filing Form 3115 (OMB 1545-2070). For
purposes of the PRA, the reporting burden associated with Form 3115
will be reflected in the PRA submission for Form 3115 (OMB 1545-2070).
Because businesses with gross receipts of up to $25 million (as
adjusted for inflation pursuant to sections 263A(i) and 446(c)) are
exempted from the requirement to capitalize costs, including interest,
under section 263A, businesses with gross receipts in excess of $25
million (as adjusted for inflation) are impacted by these final
regulations. Approximately 30,000 taxpayers with gross receipts in
excess of $25 million (as adjusted for inflation) reported that they
were subject to section 263A during the past five years. This number is
based upon the number of taxpayers who reported that they were subject
to section 263A on Form 1120, U.S. Corporation Income Tax Return, Form
1125-A, Cost of Goods Sold, and Form 4562, Depreciation and
Amortization (Including Information on Listed Property).
It is estimated that no more than 1 percent of these businesses
will make improvements to real or tangible personal property that
constitute the production of designated property for which a change in
accounting method will be made in any one year. Therefore, it is
estimated that approximately 300 taxpayers may be impacted by the
changes in these final regulations.
III. Regulatory Flexibility Act
Taxpayers with gross receipts of up to $25 million (as adjusted for
inflation) are exempted from the requirement to capitalize costs,
including interest, under section 263A. Therefore, very few, if any,
small entities will be affected by these regulations. The Secretary of
the Treasury hereby certifies that these final regulations will not
have a significant economic impact on a substantial number of small
entities within the meaning of section 601(6) of the Regulatory
Flexibility Act (5 U.S.C. chapter 6).
IV. Section 7805(f)
Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking preceding these final regulations was submitted to the Chief
Counsel of the Office of Advocacy of the Small Business Administration
for comment on its impact on small business. No comments on that notice
of proposed rulemaking were received from the Chief Counsel for the
Office of Advocacy of the Small Business Administration.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
State, local, or Tribal government, in the aggregate, or by the private
sector, of $100 million (updated annually for inflation). These final
regulations do not include any Federal mandate that may result in
expenditures by State, local, or Tribal governments, or by the private
sector in excess of that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. These final regulations do not have
federalism implications and does not impose substantial direct
compliance costs on State and local governments or preempt State law
within the meaning of the Executive order.
VII. Congressional Review Act
Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the Office of Information and Regulatory Affairs designated this rule
as not a major rule, as defined by 5 U.S.C. 804(2).
Drafting Information
The principal authors of these regulations are Elizabeth Boone and
Max Fishman of the Office of the Associate Chief Counsel (Income Tax
and Accounting). However, other personnel from the Treasury Department
and IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, the Treasury Department and the IRS amend 26 CFR part
1 as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read,
in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Sections 1.263A-8 through 1.263A-15 also issued under 26 U.S.C.
263A(j).
* * * * *
Sec. 1.263A-0 [Amended]
Par. 2. Section 1.263A-0 is amended by removing the entries for
Sec. 1.263A-11(e)(1) and (2).
Par. 3. Section 1.263A-8 is amended by revising paragraph (d)(3)(i)
to read as follows:
Sec. 1.263A-8 Requirement to capitalize interest.
* * * * *
(d) * * *
(3) * * *
(i) In general. Any improvement to real or tangible personal
property under Sec. 1.263(a)-3, or any improvement to tangible
personal property as defined in Sec. 1.263A-2(a)(2)(ii), constitutes
the production of property. Generally, any improvement to designated
property constitutes the production of designated property. An
improvement is not treated as the production of designated property,
however, if the de minimis exception described in paragraph (b)(4) of
this section applies to the improvement. Paragraph (d)(3)(iii) of this
section provides an exception for certain improvements to tangible
personal property. In addition, improvements to designated property
under this paragraph (d)(3)(i) do not include repairs and maintenance
described in Sec. 1.162-4(a).
* * * * *
Par. 4. Section 1.263A-11 is amended by revising paragraphs (e) and
(f) to read as follows:
Sec. 1.263A-11 Accumulated production expenditures.
* * * * *
(e) Improvements. If an improvement constitutes the production of
designated property under Sec. 1.263A-8(d)(3), accumulated production
expenditures with respect to the improvement consist of all direct and
indirect costs required to be capitalized with respect to the
improvement. See Sec. 1.263A-12(d)(1) to determine when the production
period for a unit of property has ended.
[[Page 47583]]
(f) Mid-production purchases. If a taxpayer purchases a unit of
property for further production before the purchased unit of property
is placed in service, the taxpayer's accumulated production
expenditures include the full purchase price of the purchased unit of
property plus all the additional direct and indirect production costs
incurred by the taxpayer that are required to be capitalized with
respect to the purchased unit of property.
* * * * *
Par. 5. Section 1.263A-15 is amended by adding paragraph (a)(6) to
read as follows:
Sec. 1.263A15 Effective dates, transitional rules, and anti-abuse
rule.
(a) * * *
(6) Sections 1.263A-8(d)(3) and 1.263A-11(e) and (f) apply to
taxable years beginning after October 2, 2025. A change in a taxpayer's
treatment of interest to a method consistent with Sec. Sec. 1.263A-
8(d)(3) and 1.263A-11(e) and (f), as applicable, is a change in method
of accounting to which sections 446 and 481 of the Internal Revenue
Code apply.
* * * * *
Edward T. Killen,
Acting Chief Tax Compliance Officer.
Approved: August 12, 2025.
Kenneth J. Kies,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2025-19279 Filed 10-1-25; 8:45 am]
BILLING CODE 4830-01-P
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