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

(a) General rule You can't deduct money you spend on new buildings, or on permanent improvements that increase the value of your property. You also can't deduct money you spend restoring property, or making up for its wear and tear, if you already got a deduction for that wear and tear. This rule has exceptions. It doesn't stop you from deducting: (A) money spent developing mines or mineral deposits, under section 616; (B) research and experimental costs, under section 174 or 174A; (C) soil and water conservation costs, under section 175; (D) money farmers spend on fertilizer and similar items, under section 180; (E) money spent removing barriers that block access for handicapped or elderly people, if you elect to deduct it under section 190; (F) money spent on "tertiary injectants" (substances used to help recover oil), deductible under section 193; and (G) through (K), amounts for which sections 179, 179B, 179C, 179D, or 179E allow a deduction instead. (b) Repealed Congress repealed this subsection in 1990. (c) Intangible drilling and development costs for oil, gas, and geothermal wells Despite the general rule in (a), and except as (i) below provides, the Secretary must write regulations letting you deduct intangible drilling and development costs as expenses for oil and gas wells. These regulations follow the option Congress approved in 1945. The same option must apply to wells drilled for geothermal deposits (as defined in section 613(e)(2)), on the same terms as oil and gas wells. This subsection doesn't apply to costs already deductible under section 59(e) or 291. (d) Railroad rolling stock If you're a domestic railroad common carrier and you pay to rehabilitate a piece of rolling stock (not a locomotive), you can elect to treat that spending as a deductible repair under section 162 or 212, instead of capitalizing it. This only works if the spending during any 12-month period is 20% or less of your basis in that unit. You make the election in the time and manner the Secretary's regulations require. You can't make this election for a year in which the (e) election (now repealed) applies to your rolling stock other than locomotives. (e) Repealed Congress repealed this subsection in 1981. (f) Railroad ties If you're a domestic rail carrier, including a switching or terminal company, and you use the retirement-replacement method to account for depreciation on your track, you must treat spending on replacement ties of any material — and their fastenings — the same way you'd treat spending on wooden replacement ties and fastenings. (g) Interest and carrying costs on straddles (1) You can't deduct interest and carrying charges tied to personal property that's part of a "straddle" (defined in section 1092(c)). Instead, you must add that amount to the property's capital account. (2) "Interest and carrying charges" means this: add up (i) interest on debt you took on to buy or hold the property, and (ii) other costs to carry it, like insurance, storage, or transport. From that total, subtract the sum of (i) interest or original issue discount you must include in income from the property, (ii) certain amounts treated as ordinary income under sections 1271(a)(3)(A), 1276, or 1281(a), (iii) dividends you must include in income minus any deduction you get for them under section 243 or 245, and (iv) payments for lending the property out as collateral, under section 512(a)(5). The result is your interest and carrying charges. For a short sale, "interest" also includes any amount you pay in connection with the personal property you used in the sale. (3) This subsection doesn't apply to hedging transactions, as defined in section 1256(e). (4) If you also have a short sale, apply subsection (h) before this one. If you have an obligation under section 1277 or 1282, apply that section before this one. (h) Payments in lieu of dividends on short sales (1) If you make a payment on stock you used in a short sale, and that payment substitutes for a dividend, you can't deduct it — as long as you close the short sale within 45 days after you started it. Instead, you add the disallowed amount to your basis in the stock you use to close the sale. (2) If the payment relates to an "extraordinary dividend," the 45-day period becomes one year. (3) "Extraordinary dividend" has the meaning given in section 1059(c), except your basis for that test is the amount you received from the short sale. (4) The 45-day or 1-year clock pauses for any time you (A) hold, have an option to buy, or must buy substantially identical stock or securities, or (B) have, under the Secretary's regulations, cut your risk of loss by holding other positions in similar or related property. (5) You may still deduct the payment, but only up to the amount that (i) counts as ordinary income to you and (ii) that you got as payment for letting someone use your collateral. This limit doesn't apply if any part of the payment is for an extraordinary dividend. (6) When both (g) and (h) could apply to a short sale, apply this subsection (h) first. (i) Intangible drilling costs for wells outside the United States For oil, gas, or geothermal wells located outside the United States, subsection (c) doesn't apply. Instead, you must either (A) elect to add these costs to your basis for figuring your depletion deduction under section 611, ignoring section 613, or (B) if you don't make that election, deduct the costs in equal parts over 10 years, starting with the year you paid or incurred them. This subsection doesn't apply to costs for a well that turns out to be nonproductive.