Fifth Circuit: Homebuilder must capitalize CEO’s salary

Homebuilder must capitalize CEO salary

The U.S. Court of Appeals for the Fifth Circuit today affirmed findings of the U.S. Tax Court that the taxpayer—a company that designs, builds, and sells homes—must capitalize (and not deduct) most of the salary paid to its founder and chief executive officer as indirect costs of production.

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The case is:  Frontier Custom Builders, Inc. v. Commissioner, No. 14-60518 (5th Cir. September 16, 2015).

Section 263A requires producers of real property to capitalize all of their production costs. The IRS determined that the CEO’s compensation was a capitalizable service cost. The Tax Court upheld the deficiency determination.

Today, the Fifth Circuit affirmed, finding that while many of the CEO’s hours were spent marketing the company, a substantial portion of his activities—for example, designing homes for later production, creating the process and procedures for building homes, selecting developers and reviewing subcontractors, and resolving issues at the worksites—directly benefitted or were incurred by reason of production. Read the Fifth Circuit’s decision [PDF 110 KB]

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