What Is the Section 263A Small Business Exemption?

If you have built, renovated, or improved a commercial or rental property in recent years, your business may have been capitalizing costs that, under the right facts, it is not required to capitalize. The reason is a provision many owners have never heard of: the small business exemption from Section 263A.

First, what is Section 263A?

Section 263A of the Internal Revenue Code is commonly called UNICAP, short for Uniform Capitalization. In general, it requires businesses that produce property (including constructing or improving real property) or acquire property for resale to capitalize certain direct and indirect costs into the basis of that property rather than deducting them currently. Indirect costs can include items such as supervision, certain overhead, insurance, and taxes tied to the project.

What changed?

The Tax Cuts and Jobs Act (TCJA) added a small business exemption for tax years beginning after 2017. A taxpayer (other than a tax shelter) that meets the gross receipts test of Section 448(c) is not required to apply Section 263A.

Who qualifies: the gross receipts test

• The threshold: average annual gross receipts of $32 million or less for tax years beginning in 2026 (Rev. Proc. 2025-32). The base amount was $25 million in 2018 and the IRS indexes it for inflation each year: $30 million for 2024 and $31 million for 2025. A study that covers an earlier year uses that year’s figure.
• The period: the average is taken over the three prior tax years.
• Related entities: gross receipts of businesses under common control can be counted together, so the test looks at your group, not just one entity.
• Tax shelters do not qualify, including some syndicates that allocate more than 35% of losses to limited partners or limited entrepreneurs.

Eligibility depends on your gross receipts (including related entities), your entity structure, and the type of project. Your CPA confirms it.

Why does it matter for real estate?

Construction and renovation projects can involve a lot of indirect cost. When a taxpayer is exempt, costs that would otherwise be capitalized under Section 263A may be deducted sooner instead of being recovered through depreciation over 27.5 or 39 years. That is a timing benefit that can improve cash flow. The exemption switches off Section 263A only; other capitalization rules, such as those for the cost of the building itself, still apply. Many businesses keep capitalizing simply because nobody on their team knows how to implement the exemption.

How is it put into effect?

Where an accounting method change is needed, it is made on Form 3115, which your CPA files. No amended return is needed. When no depreciation has been taken yet on the costs, they may simply be a current-year deduction. Your CPA determines the filing position.

What should you do next?

• Ask your CPA whether your business, including related entities, meets the gross receipts test for the tax year in question.
• Gather cost records and timelines for recent construction and renovation projects.
• See whether a screening makes sense. Our Free Calculator takes about two minutes, or read how a 263A exemption study works.