Unlocking Tax Savings with the UNICAP (263A) Small Business Exemption for Self-Constructed Assets

What Is the UNICAP (263A) Small Business Exemption?

This provision of the tax code allows qualifying small businesses to expense certain indirect and soft costs—such as architectural fees, design costs, and construction-related overhead—rather than capitalizing them. For commercial property owners engaged in constructing or improving buildings used in their own business, this can result in substantial tax deductions and improved cash flow.

What makes this opportunity so compelling is that these expenses are not subject to recapture tax, and they can often be deducted in the year they are incurred—even if the building is placed in service in a later year.

Who Qualifies?

To take advantage of this exemption, a business must meet several key criteria:

  • Small Business Gross Receipts Threshold:
    • 2018: $25 million
    • 2021: $26 million
    • 2022: $27 million
    • 2023: $29 million
    • 2024: $30 million
    • 2025: $31 million
  • The property must be a self-constructed asset used in the taxpayer’s trade or business.
  • Syndicates are not eligible.
  • Businesses subject to Section 163(j) interest limitations do not qualify.

This provision applies to new construction or improvements placed in service after January 1, 2018, and is especially beneficial for small business owners developing or renovating their own commercial buildings.

Why You Haven’t Heard About It

Although this tax benefit was introduced in the 2017 Tax Cuts and Jobs Act (TCJA), it remained largely under the radar until the IRS issued guidance in January 2022, making it clear that the accounting change required to take advantage of this exemption can be made automatically using Form 3115. A detailed article by The Tax Adviser in May 2022 was one of the first to highlight this development, followed by a deeper look in their October 2023 issue.

How Much Can You Save?

Soft and indirect costs can account for 10–20% of total construction or renovation budgets. For a $2 million project, that could mean $200,000–$400,000 in potential expenses that would otherwise be capitalized over decades.

How We Help

I work with Specialty Tax LLC to get this work done for clients. Their team are experts in this little known aspect of the tax code and they perform the study, draft the IRS Change of Accounting Form 3115 if it’s needed as well as calculate the 481(a) adjustment.

Think of this like a cost segregation study—just applied to soft costs rather than hard costs that must be capitalized. It’s another way to unlock tax savings from your real estate investment and improvements. While there is not a minimum required improvement amount in order to qualify for this exemption, we find that at about $200,000 in improvement costs / building costs, it makes sense to engage us for a study….at least get a quote. There’s no cost or obligation to do the study with us.

Also, your CPA or tax advisor might decide to do this on their own for you. Just realize that our team at Specialty Tax are experts in this highly technical and relatively unknown part of the tax code. Let’s say you have a $200,000 improvement project that you want to utilize the UNICAP 263A Small Business Exemption. If your tax advisor or CPA misses out on $7,500 – $10,000 in costs that could have been expensed but weren’t, you could have effectively paid for your study had we done the work and identified those costs.

If you’re a CPA, developer, or business owner with qualifying projects—or if you’re not sure whether you qualify—let’s talk. We’re happy to run the numbers and help you determine what’s possible.

Contact us today to explore how this powerful strategy could benefit your next project.

Here’s a short 4 minute overview I put together on the subject.