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With certain types of property, it may be beneficial for the taxpayer to capitalize expenses rather than to deduct those expenses. If the election is made, the taxpayer would not report any of the expenses on their tax return. Instead, the taxpayer will adjust their cost basis in the property.

If eligible to make an election under IRC Section 266 to capitalize interest, taxes, and other deductible carrying charges with respect to property, this would be done by attaching a statement to the original return for the year of the election. Presumably, this is the due date of the return including extensions, although the regulations do not specifically state this.

An example statement to attach to a tax return:

Election to Capitalize Property Carrying Charges. The taxpayer hereby elects, pursuant to IRC Sec. 266, to capitalize, rather than to deduct, the following carrying costs incurred with respect to [describe property] located at [property location].

Below this, provide both a description and amount for the costs relating to this election.

With TaxAct®, you are able to electronically file your return and include this statement.

To include the election explanation in your return to be either paper filed or electronically filed:

  1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
  2. Click Miscellaneous Topics in the Federal Quick Q&A Topics menu to expand, click Additional Information for E-Filing to expand, then click E-Filing Notes and Explanations.
  3. Continue with the interview process to enter all of the appropriate information.
  4. On the screen titled E-Filing - Election Explanations for Electronic Return, enter the statement, then click Continue.

Additional Information

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.


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