26 U.S.C. § 263 — Capital expenditures

(a) General rule: You can't deduct money you pay for new buildings or for permanent improvements that raise the value of property. This rule doesn't apply if the spending fits under other specific sections: (A) mine or deposit development costs (section 616), (B) research and experimental costs (section 174 or 174A), (C) soil and water conservation costs (section 175), (D) farmer fertilizer costs (section 180), (E) costs to remove barriers for disabled and elderly people that you elect to deduct under section 190, (F) tertiary injectant costs (section 193), and (G) through (K) costs deducted under sections 179, 179B, 179C, 179D, or 179E. You also can't deduct money spent restoring property or making up for its wear and tear, if you already got an allowance (like depreciation) for that wear and tear.

(b) Repealed. This subsection has no legal effect — Congress repealed it in 1990.

(c) Intangible drilling and development costs for oil, gas, and geothermal wells: Even though subsection (a) generally blocks deductions for permanent improvements, the Secretary^* must write regulations letting taxpayers elect to deduct as expenses the "intangible" drilling and development costs of oil and gas wells — the same option Congress recognized in 1945. These regulations must give the same option for wells drilled for geothermal deposits (as defined in section 613(e)(2)). This subsection doesn't apply to costs that already get a deduction under section 59(e) or section 291.

(d) Railroad rolling stock^*: If a domestic railroad rehabilitates a unit of rolling stock (not a locomotive) with spending that would normally have to be capitalized, the railroad can instead deduct that spending immediately as a repair under section 162 or 212 — but only for spending that, in any 12-month period, doesn't exceed 20% of what the railroad originally paid for that unit. The railroad must formally elect this treatment, in the time and manner the Secretary's regulations require. It can't make this election for a year in which the now-repealed subsection (e) election applies to rolling stock other than locomotives.

(e) Repealed. This subsection has no legal effect — Congress repealed it in 1981.

(f) Railroad ties: A domestic railroad (including a switching or terminal company) that uses the "retirement-replacement" method to account for depreciation of its track must treat spending on replacement ties made of any material, and the fastenings for them, the same way it treats spending on replacement wooden ties.

(g) Interest and carrying costs for straddles: (1) You can't deduct interest and carrying costs tied to personal property that's part of a "straddle," as defined in section 1092(c). That disallowed amount instead gets added to the property's capital account. (2) "Interest and carrying charges" means: add up the interest on debt used to buy or hold the property, plus other costs like insuring, storing, or transporting it; then subtract out the interest (including original issue discount) you must report as income on that property, certain ordinary-income amounts under sections 1271(a)(3)(A), 1276, or 1281(a), dividend income above what you can deduct under sections 243 or 245, and certain security-loan payments you received on the property. "Interest" for this purpose also includes amounts paid on property used in a short sale. (3) This rule doesn't apply to hedging transactions, as defined in section 1256(e). (4) On timing: for a short sale, this rule is applied after subsection (h); for debt covered by section 1277 or 1282, this rule is applied after those sections.

(h) Payments in lieu of dividends on short sales: (1) If you make a payment on stock you used in a short sale, standing in for a dividend, and you close the short sale within 45 days of starting it, you can't deduct that payment — it instead gets added to the basis of the stock used to close the sale. (2) If the payment relates to an "extraordinary dividend," the window becomes 1 year after the short sale instead of 45 days. (3) "Extraordinary dividend" has the meaning given in section 1059(c), treating the amount you realized in the short sale as your basis in the stock. (4) The 45-day (or 1-year) clock pauses during any time you hold, have an option to buy, or are under a contractual obligation to buy substantially identical stock or securities, or during any time regulations say you've reduced your risk of loss by holding related positions. (5) The rule against deducting the payment only applies to the amount by which it exceeds what you received as ordinary-income compensation for the use of your collateral in the short sale — unless the payment relates to an extraordinary dividend, in which case the full disallowance still applies. (6) For a short sale, this subsection is applied before subsection (g).

(i) Intangible drilling costs outside the United States: For wells located outside the U.S., subsection (c)'s option to deduct these costs as expenses does not apply. Instead, you must either (A) elect to add the costs to your basis for figuring your depletion deduction under section 611 (figured without regard to section 613), or (B) if you don't make that election, deduct the costs evenly over the 10 tax years starting with the year you paid or incurred them. None of this applies to costs for a well that turns out to be nonproductive.