2025-19279: Interest Capitalization Requirements for Improvements That Constitute Designated Property

Federal Register, Volume 90 Issue 189 (Thursday, October 2, 2025) [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 [www.gpo.gov] [FR Doc No: 2025-19279] ======================================================================= ----------------------------------------------------------------------- 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. -----------------------------------------------------------------------

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 https://www.regulations.gov 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.

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