Publication 535
Business Expenses

For use in preparing 2002 Returns

Development Costs

You can deduct costs paid or incurred during the tax year for developing a mine or any other natural deposit (other than an oil or gas well) located in the United States. These costs must be paid or incurred after the discovery of ores or minerals in commercially marketable quantities. Development costs include those incurred for you by a contractor. Also, development costs include depreciation on improvements used in the development of ores or minerals. They do not include costs for the acquisition or improvement of depreciable property.

Instead of deducting development costs in the year paid or incurred, you can choose to treat them as deferred expenses and deduct them ratably as the units of produced ores or minerals benefited by the expenses are sold. This choice applies each tax year to expenses paid or incurred in that year. Once made, the choice is binding for the year and cannot be revoked for any reason.

How to make the choice.   The choice to deduct development costs ratably as the ores or minerals are sold must be made for each mine or other natural deposit by a clear indication on your return or by a statement filed with the IRS office where you file your return. Generally, you must make the choice by the due date of the return (including extensions). However, if you timely filed your return for the year without making the choice, you can still make the choice by filing an amended return within 6 months of the due date of the return (excluding extensions). Clearly indicate the choice on your amended return and write Filed pursuant to section 301.9100-2. File the amended return at the same address you filed the original return.

Foreign development costs.   The rules discussed earlier for foreign exploration costs apply to foreign development costs.

Reduced corporate deductions for development costs.   The rules discussed earlier for reduced corporate deductions for exploration costs also apply to corporate deductions for development costs.

Circulation Costs

A publisher can deduct as a current business expense the costs of establishing, maintaining, or increasing the circulation of a newspaper, magazine, or other periodical. For example, a publisher can deduct the cost of hiring extra employees for a limited time to get new subscriptions through telephone calls. Circulation costs are deductible even if they normally would be capitalized.

This rule does not apply to the following costs that must be capitalized.

• The purchase of land or depreciable property.
• The acquisition of circulation through the purchase of any part of the business of another publisher of a newspaper, magazine, or other periodical, including the purchase of another publisher's list of subscribers.

Other treatment of circulation costs.   If you do not want to deduct circulation costs as a current business expense, you can choose one of the following ways to recover these costs.

• Capitalize all circulation costs that are properly chargeable to a capital account.
• Amortize circulation costs over the 3-year period beginning with the tax year they were paid or incurred.

How to make the choice.   You choose to capitalize circulation costs by attaching a statement to your return for the first tax year the choice applies. Your choice is binding for the year it is made and for all later years, unless you get IRS approval to revoke it.

Environmental Cleanup Costs

Environmental cleanup (remediation) costs are generally capital expenditures. However, you can choose to deduct these costs as a current business expense if certain requirements (discussed later) are met. This special tax treatment is generally available for qualified environmental cleanup costs you pay or incur before January 1, 2004.

Qualified environmental cleanup costs.   Qualified environmental cleanup costs are generally costs you pay or incur to abate or control a hazardous substance at a qualified contaminated site.

Hazardous substance.   Hazardous substances are defined in section 101(14) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 and certain substances are designated as hazardous in section 102 of the Act. Substances are not hazardous if a removal or remedial action is prohibited under sections 104 and 104(a)(3) of the Act.

Qualified contaminated site.   A qualified contaminated site is any area that meets both of the following requirements.

1. You hold it for use in a trade or business, for the production of income, or as inventory.
2. There has been a release, threat of release, or disposal of a hazardous substance at or on the site.

You must get a statement from the designated state environmental agency that the site meets requirement (2).

A site is not eligible if it is on, or proposed for, the national priorities list under section 105(a)(8)(B) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980. To find out if a site is on the national priorities list, contact the U.S. Environmental Protection Agency.

Expenditures for depreciable property.   You cannot deduct the cost of acquiring depreciable property used in connection with the abatement or control of hazardous substances at a qualified contaminated site. However, the part of the depreciation for such property that is otherwise allocated to the qualified contaminated site shall be treated as a qualified environmental cleanup cost.

When and how to choose.   You choose to deduct environmental cleanup costs by taking the deduction on the income tax return (filed by the due date including extensions) for the taxable year in which the costs are paid or incurred. The costs are deducted differently depending on the type of business entity involved.

Individuals.   Deduct the environmental cleanup costs on the Other Expenses line of Schedule C, E, or F (Form 1040). If the schedule requires you to separately identify each expense included in Other Expenses write Section 198 Election on the line next to the environmental cleanup costs.

All other entities.   All other taxpayers (including S corporations, partnerships, and trusts) deduct the environmental cleanup costs on the Other Deductions line of the appropriate federal income tax return. On the schedule attached to the return that separately identifies each expense included in Other Deductions write Section 198 Election on the line next to the environmental cleanup costs.

More than one environmental cleanup cost.   If, for any taxable year, you pay or incur more than one environmental cleanup cost, you can choose to deduct one or more of such expenditures for that year. You can choose to deduct one expenditure and choose to capitalize another expenditure (whether or not they are of the same type or paid or incurred with respect to the same qualified contaminated site). A choice to deduct an expenditure for one year has no effect on other years. You must make a separate choice for each year in which you intend to deduct qualified environmental cleanup costs.

Recapture.   This deduction may have to be recaptured as ordinary income under section 1245 when you sell or otherwise dispose of the property that would have received an addition to basis if you had not chosen to deduct the expenditure. For more information on recapturing the deduction, see Depreciation and amortization under Gain Treated as Ordinary Income in Publication 544.

Costs to clean up land.   For more information on costs you can deduct for the environmental cleanup of land see Environmental cleanup costs in chapter 13.

More information.   For more information about the environmental cleanup cost deduction, see section 198 of the Internal Revenue Code.

Retired Asset Removal Costs

If you retire and remove a depreciable asset in connection with the installation or production of a replacement asset, you can deduct the costs of removing the retired asset. However, if you replace a component (part) of a depreciable asset, capitalize the removal costs if the replacement is an improvement and deduct the costs if the replacement is a repair.

Barrier Removal Costs

The cost of an improvement to a business asset is normally a capital expense. However, you can choose to deduct the costs of making a facility or public transportation vehicle more accessible to and usable by those who are disabled or elderly. You must own or lease the facility or vehicle for use in connection with your trade or business.

A facility is all or any part of buildings, structures, equipment, roads, walks, parking lots, or similar real or personal property. A public transportation vehicle is a vehicle, such as a bus or railroad car, that provides transportation service to the public (including service for your customers, even if you are not in the business of providing transportation services).

You cannot deduct any costs that you paid or incurred to completely renovate or build a facility or public transportation vehicle or to replace depreciable property in the normal course of business.

Deduction limit.   The most you can deduct as a cost of removing barriers to the disabled and the elderly for any tax year is $15,000. However, you can add any costs over this limit to the basis of the property and depreciate these excess costs.

Partners and partnerships.   The $15,000 limit applies to a partnership and also to each partner in the partnership. A partner can allocate the $15,000 limit in any manner among the partner's individually incurred costs and the partner's distributive share of partnership costs. If the partner cannot deduct the entire share of partnership costs, the partnership can add any costs not deducted to the basis of the improved property.

A partnership must be able to show that any amount added to basis was not deducted by the partner and that it was over a partner's $15,000 limit (as determined by the partner). If the partnership cannot show this, it is presumed that the partner was able to deduct the distributive share of the partnership's costs in full.

Example.   John Duke's distributive share of ABC partnership's deductible expenses for the removal of architectural barriers was $14,000. John had $12,000 of similar expenses in his sole proprietorship. He chose to deduct $7,000 of them. John allocated the remaining $8,000 of the $15,000 limit to his share of ABC's expenses. John can add the excess $5,000 of his own expenses to the basis of the property used in his business. Also, if ABC can show that John could not deduct $6,000 ($14,000 - $8,000) of his share of the partnership's expenses because of how John applied the limit, ABC can add $6,000 to the basis of its property.

Qualification standards.   You can deduct your costs as a current expense only if the barrier removal meets one or more of the following specific standards for improved access for the disabled or the elderly.

Grading.   The ground must be graded to the level of a normal entrance to make the facility accessible to people with physical disabilities.

Walks.  

1. A public walk must be at least 48 inches wide and cannot slope more than 5%. A fairly long walk of maximum or near maximum steepness must have level areas at regular intervals. A walk or driveway must have a nonslip surface.
2. A walk must have a continuing common surface and must not have steps or sudden changes in level.
3. Where a walk crosses another walk, a driveway, or a parking lot, they must blend to a common level. However, this does not require the removal of curbs that are a safety feature for those with disabilities, especially blindness.
4. A sloping walk must have a level platform at the top and at the bottom. If a door swings out onto the platform toward the walk, the platform must be at least 5 feet deep and 5 feet wide. If a door does not swing onto the platform or toward the walk, the platform must be at least 3 feet deep and 5 feet wide. A platform must extend at least 1 foot past the opening side of any doorway.

Parking lots.  

1. At least one accessible parking space close to a facility must be set aside and marked for use by persons with disabilities.
2. A parking space must be open on one side to allow room for a person in a wheelchair or on braces or crutches to get in and out of a car onto a level surface suitable for wheeling and walking.
3. A parking space marked for use by persons with disabilities, when placed between two regular diagonal or head-on parking spaces, must be at least 12 feet wide.
4. A parking space must be located so that a person in a wheelchair or on braces or crutches does not have to wheel or walk behind parked cars.

Ramps.  

1. A ramp must not rise more than 1 inch in each foot of length.
2. A ramp must have at least one handrail that is 32 inches high, measured from the surface of the ramp. The handrail must be smooth and must extend at least 1 foot past the top and bottom of the ramp. However, this does mean that a handrail extension that is itself a hazard is required.
3. A ramp must have a nonslip surface.
4. A ramp must have a level platform at the top and at the bottom. If a door swings out onto the platform or toward the ramp, the platform must be at least 5 feet deep and 5 feet wide. If a door does not swing onto the platform or toward the ramp, the platform must be at least 3 feet deep and 5 feet wide. A platform must extend at least 1 foot past the opening side of any doorway.
5. A ramp must have level platforms no farther than 30 feet apart and at any turn.
6. A curb ramp with a nonslip surface must be provided at an intersection. The curb ramp must not be less than 4 feet wide and must not rise more than 1 inch in each foot of length. The two surfaces must blend smoothly.

Entrances.   A building must have at least one main entrance that a person in a wheelchair can use. The entrance must be on a level accessible to an elevator.

Doors and doorways.  

1. A door must have a clear opening of at least 32 inches and must be operable by a single effort.
2. The floor on the inside and outside of a doorway must be level for at least 5 feet from the door in the direction the door swings and must extend at least 1 foot past the opening side of the doorway.
3. There must not be any sharp slopes or sudden changes in level at a doorway. The threshold must be flush with the floor. The door closer must be selected, placed, and set so as not to impair the use of the door by persons with disabilities.

Stairs.  

1. Stairsteps must have round nosing of between 1 and 1½ inch radius.
2. Stairs must have a handrail 32 inches high, measured from the tread at the face of the riser.
3. Stairs must have at least one handrail that extends at least 18 inches past the top step and the bottom step. But this does not mean that a handrail extension that is itself a hazard is required.
4. Each step must not be more than 7 inches high.

Floors.  

1. Floors must have a nonslip surface.
2. Floors on each story of a building must be on the same level or must be connected by a ramp of the type discussed previously.

Toilet rooms.  

1. A toilet room must have enough space for persons in wheelchairs to move around.
2. A toilet room must have at least one toilet stall that:
   1. Is at least 36 inches wide,
   2. Is at least 56 inches deep,
   3. Has a door, if any, that is at least 32 inches wide and swings out,
   4. Has handrails on each side that are 33 inches high and parallel to the floor, 1½ inches in outside diameter, 11/2 inches away from the wall, and fastened securely at the ends and center, and
   5. Has a toilet with a seat 19 to 20 inches from the finished floor.
3. A toilet room must have, in addition to or instead of the toilet stall described in (2), at least one toilet stall that:
   1. Is at least 66 inches wide,
   2. Is at least 60 inches deep,
   3. Has a door, if any, that is at least 32 inches wide and swings out,
   4. Has a handrail on one side, 33 inches high and parallel to the floor, 1½ inches in outside diameter, 11/2 inches away from the wall, and fastened securely at the ends and center, and
   5. Has a toilet with a seat 19 to 20 inches from the finished floor with a centerline 18 inches from the side wall on which the handrail is located.
4. A toilet room must have sinks with narrow aprons. Drain pipes and hot water pipes under a sink must be covered or insulated.
5. A mirror and a shelf above a sink must not be higher than 40 inches above the floor, measured from the top of the shelf and the bottom of the mirror.
6. A toilet room for men must have wall-mounted urinals with the opening of the basin 15 to 19 inches from the finished floor or floor-mounted urinals that are level with the main floor.
7. Towel racks, towel dispensers, and other dispensers and disposal units must not be mounted higher than 40 inches from the floor.

Water fountains.  

1. A water fountain and a cooler must have up-front spouts and controls.
2. A water fountain and a cooler must be hand-operated or hand-and-foot-operated.
3. A water fountain mounted on the side of a floor-mounted cooler must not be more than 30 inches above the floor.
4. A wall-mounted, hand-operated water cooler must be mounted with the basin 36 inches from the floor.
5. A water fountain must not be fully recessed and must not be set into an alcove unless the alcove is at least 36 inches wide.

Public telephones.  

1. A public telephone must be placed so that a person in a wheelchair can reach the dial and the headset.
2. A public telephone must be equipped for a person who is hearing impaired and it must be identified as such with instructions for its use.
3. Coin slots of public telephones must not be more than 48 inches from the floor.

Elevators.  

1. An elevator must be accessible to, and usable by, persons with disabilities and the elderly on the levels they use to enter the building and all levels and areas normally used.
2. Cab size must measure at least 54 by 68 inches to allow for turning a wheelchair.
3. Door clear opening width must be at least 32 inches.
4. All controls needed must be within 48 to 54 inches from the cab floor. These controls must be usable by a person with a visual impairment and must be identifiable by touch.

Controls.   Switches and controls for light, heat, ventilation, windows, draperies, fire alarms, and all similar controls needed or used often must be placed within the reach of a person in a wheelchair. These switches and controls must not be higher than 48 inches from the floor.

Identification.  

1. Raised letters or numbers must be used to identify rooms and offices. These identification marks must be placed on the wall to the right or left of the door at a height of 54 to 66 inches above the finished floor.
2. A door that might prove dangerous if a visually impaired person used it, such as a door leading to a loading platform, boiler room, stage, or fire escape, must be identifiable by touch.

Warning signals.  

1. An audible warning signal must be accompanied by a simultaneous visual signal for the benefit of hearing impaired persons.
2. A visual warning signal must be accompanied by a simultaneous audible signal for the benefit of visually impaired persons.

Hazards.   Hanging signs, ceiling lights, and similar objects and fixtures must be at least 7 feet above the floor.

International accessibility symbol.   The international accessibility symbol must be displayed on routes to a wheelchair-accessible entrance to a facility, at the entrance itself, and at wheelchair-accessible entrances to public transportation vehicles. This symbol is the outline drawing of a person in a wheelchair and is shown in the following illustration.

International accessibility symbol

Rail facilities.  

1. A rail facility must have a fare control area with at least one entrance with a clear opening at least 36 inches wide.
2. A boarding platform edge bordering a drop-off or other dangerous condition must be marked with a strip of floor material different in color and texture from the rest of the floor surface. The gap between the boarding platform and vehicle doorway must be as small as possible.

Buses.  

1. A bus must have a mechanism such as a lift or ramp to enter the bus and enough clearance to let a wheelchair user reach a secure location.
2. The bus must have a wheelchair-securing device. However, this does not mean that a wheelchair-securing device that is itself a barrier or hazard is required.
3. The vertical distance from a curb or from street level to the first front doorstep must not be more than 8 inches. Each front doorstep after the first step up from the curb or street level must also not be more than 8 inches high. The steps at the front and rear doors must be at least 12 inches deep.
4. The bus must have clearly legible signs that indicate that seats in the front of the bus are priority seats for persons who have a disability or are elderly. The signs must encourage other passengers to make these seats available to those having priority who wish to use them.
5. Handrails and stanchions must be provided in the entrance to the bus so that passengers who have a disability or are elderly can grasp them from outside the bus and use them while boarding and paying the fare. This system must include a rail across the front of the bus interior that passengers can lean against while paying fares. Overhead handrails must be continuous except for a gap at the rear doorway.
6. Floors and steps must have nonslip surfaces. Step edges must have a band of bright contrasting color running the full width of the step.
7. A stepwell next to the driver must have, when the door is open, at least 2 foot-candles of light measured on the step tread. Other stepwells must have, at all times, at least 2 foot-candles of light measured on the step tread.
8. The doorways of the bus must have outside lighting that provides at least 1 foot-candle of light on the street surface for a distance of 3 feet from the bottom step edge. This lighting must be below window level and must be shielded to protect the eyes of entering and exiting passengers.
9. The fare box must be located as far forward as practical and must not block traffic in the vestibule.

Rapid and light rail vehicles.  

1. Passenger doorways on the vehicle sides must have clear openings at least 32 inches wide.
2. Audible or visual warning signals must be provided to alert passengers who have a disability or are elderly of closing doors.
3. Handrails and stanchions must permit safe boarding, moving around, sitting and standing assistance, and getting off by persons who have a disability or are elderly. On a level-entry vehicle, handrails, stanchions, and seats must be located to allow a wheelchair user to enter the vehicle and position the wheelchair in a location that does not block the movement of other passengers. On a vehicle with steps that must be used in boarding, handrails and stanchions must be provided in the entrance so that persons who have a disability or are elderly can grasp them from outside the vehicle and use them while boarding.
4. Floors must have nonslip surfaces. Step edges on a light rail vehicle must have a band of bright contrasting color running the full width of the step.
5. A stepwell next to the driver must have, when the door is open, at least 2 foot-candles of light measured on the step tread. Other stepwells must have, at all times, at least 2 foot-candles of light measured on the step tread.
6. Doorways on a light rail vehicle must have outside lighting that provides at least 1 foot-candle of light on the street surface for a distance of 3 feet from the bottom step edge. This lighting must be below window level and must be shielded to protect the eyes of entering and exiting passengers.

Other barrier removals.   To be deductible, expenses of removing any barrier not covered by the above standards must meet all three of the following tests.

1. The removed barrier must be a substantial barrier to access or use of a facility or public transportation vehicle by persons who have a disability or are elderly.
2. The removed barrier must have been a barrier for at least one major group of persons who have a disability or are elderly (such as people who are blind, deaf, or wheelchair users).
3. The barrier must be removed without creating any new barrier that significantly impairs access to or use of the facility or vehicle by a major group of persons who have a disability or are elderly.

How to make the choice.   If you choose to deduct your costs for removing barriers to the disabled or the elderly, claim the deduction on your income tax return (partnership return for partnerships) for the tax year the expenses were paid or incurred. Identify the deduction as a separate item. The choice applies to all the qualifying costs you have during the year, up to the $15,000 limit. If you make this choice, you must maintain adequate records to support your deduction.

For your choice to be valid, you generally must file your return by its due date, including extensions. However, if you timely filed your return for the year without making the choice, you can still make the choice by filing an amended return within 6 months of the due date of the return (excluding extensions). Clearly indicate the choice on your amended return and write Filed pursuant to section 301.9100-2. File the amended return at the same address you filed the original return. Your choice is irrevocable after the due date, including extensions, of your return.

Disabled access credit.   If you make your business accessible to persons with disabilities and your business is an eligible small business, you may be able to take the disabled access credit. If you choose to take the credit, you must reduce the amount you deduct or capitalize by the amount of the credit.

For more information about the disabled access credit, see Form 8826.

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