Yes — in most cases, capitalizing insurance costs during construction is required, not optional. Section 263A of the Internal Revenue Code, known as the Uniform Capitalization or UNICAP rules, treats insurance as an indirect production cost that has to be added to the property’s cost basis and recovered through depreciation over the building’s useful life.1Office of the Law Revision Counsel. 26 U.S.C. 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses You don’t get to deduct those premiums in the year you pay them. There are a few important exceptions, so it’s worth understanding which insurance costs actually fall under the rule before you file.
The rule reaches farther than many builders expect. If you hire a general contractor to put up a warehouse for you, the IRS treats you as the producer of the property, and your share of insurance costs is subject to UNICAP just as if you were swinging the hammer yourself.1Office of the Law Revision Counsel. 26 U.S.C. 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses If the contractor carries builder’s risk and passes the premium through in the contract price, that cost goes into the basis of the building.
Which Insurance Premiums Have to Be Capitalized
Not every policy a business pays for during a construction period gets folded into the building’s basis. The cost has to be allocable to the production of the specific asset — meaning the insurance exists because of the project, or at least a share of it does.
- Builder’s risk insurance. Covers physical damage to the structure, stored materials, and equipment on site during the build. Premiums typically run between 1% and 4% of total construction value. Because the policy wouldn’t exist without the project, the full premium capitalizes.
- Project-specific general liability. A liability policy bought to cover a single site is tied directly to production. If your general liability is company-wide instead, only the portion allocable to the project gets capitalized.
- Workers’ compensation. Premiums for laborers on the job site follow their wages. If you capitalize the direct labor, the associated workers’ comp premium capitalizes with it as an indirect cost.
- Professional liability. Coverage for architects or engineers on the project is capitalizable when the policy is project-specific or when a reasonable allocation ties it to the asset.
- Umbrella or excess liability. Additional layers purchased because of the project’s scope get the same treatment. No project, no policy, so the premium belongs in the basis.
Insurance that would exist whether or not you were building anything — your officers’ policy, coverage on your existing office — stays a current-year expense. The dividing line is whether the cost exists because of the construction activity.
How to Allocate a Company-Wide Policy to a Project
Most builders don’t buy separate coverage for each job. One general liability or workers’ comp policy covers the whole company, and only a slice relates to any given project. The IRS requires a reasonable method for splitting that cost.
The common approach is exposure-based. You assign a share of the premium based on the project’s share of the relevant exposure. For workers’ comp, that usually means payroll: if a project generates 30% of your construction payroll, it picks up 30% of the workers’ comp premium. For general liability, the base might be revenue, square footage, or another measure that reflects the project’s share of risk.
For taxpayers producing property, the regulations also allow a simplified production method that uses an absorption ratio to spread additional Section 263A costs across capitalized assets. Insurance flows into that calculation as one of the indirect costs.
Whichever method you pick, use it consistently. Switching allocation methods between years without filing a change-in-accounting-method request is the kind of inconsistency that draws examiners.
When the Capitalization Period Starts and Ends
For indirect costs like insurance, capitalization isn’t tightly tied to the formal “production period.” The regulations require you to capitalize costs allocable to property you produce whether those costs are incurred before, during, or after the production period. In practice, this rarely matters for construction-specific coverage like builder’s risk, because that policy doesn’t exist until the project is underway. It does matter for something like insurance on land you’re holding for future development: if construction is reasonably likely, those pre-production carrying costs get capitalized before you break ground.2GovInfo. 26 CFR 1.263A-2 – Rules Relating to Property Produced by the Taxpayer
The production period concept is stricter for interest capitalization under Section 263A(f). It begins on the first date any physical activity is performed on the property, such as clearing, grading, or pouring footings, and it applies to both contractor and owner.3eCFR. 26 CFR 1.263A-12 – Production Period Interest incurred before that first physical activity is not capitalizable.
The window closes when the property is placed in service — ready for its intended use. For a building, that’s usually when you receive a certificate of occupancy or when the space is substantially complete and available for tenants or operations, whichever comes first. From that point forward, every insurance premium shifts to the income statement. The builder’s risk policy is replaced by a standard property policy, and those premiums are ordinary deductible business expenses. Continuing to capitalize insurance after the asset is in service overstates basis and understates current expenses.
One situation catches people out: a finished building that sits empty. A completed but unoccupied building is still placed in service if it’s available for use. Insurance on a finished, vacant building is a holding cost, deducted currently rather than capitalized.4Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
The Small Business Exemption
Not every business has to run the UNICAP calculation. Section 263A includes an exemption tied to the gross receipts test under Section 448(c). If your average annual gross receipts over the prior three tax years are at or below the inflation-adjusted threshold, you’re generally exempt from UNICAP altogether, including the obligation to capitalize construction-period insurance.
For tax years beginning in 2025, that threshold is $31 million.5Internal Revenue Service. Revenue Procedure 2024-40 The IRS adjusts the figure annually, so check the current revenue procedure for the year you’re filing. The exemption is not available to tax shelters or to syndicates where more than 35% of losses flow to limited partners or limited entrepreneurs.6Federal Register. Small Business Taxpayer Exceptions Under Sections 263A, 448, 460 and 471
If you qualify, you can deduct construction-period insurance premiums as ordinary business expenses in the year you pay them. For a smaller contractor or developer, that’s a real cash-flow difference compared to recovering the cost over decades of depreciation.
Building for Personal Use
Section 263A only applies to property produced in a trade or business or in an activity conducted for profit. Building a home for yourself doesn’t trigger UNICAP.1Office of the Law Revision Counsel. 26 U.S.C. 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses Insurance costs still form part of your cost basis in the home under general tax principles, but the UNICAP framework itself doesn’t govern the calculation.4Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
Documentation That Holds Up on Audit
The IRS doesn’t argue whether construction insurance is capitalizable in principle. What gets contested is the amount allocated to a specific project and the dates that bracket the capitalization period. A few records handle most of that risk:
- Policy declarations pages. Keep the dec page for every construction-period policy showing the named project, coverage dates, and premium. For a project-specific policy like builder’s risk, this one document proves the entire cost is allocable.
- Allocation workpapers. When you’re splitting a company-wide policy across projects, document the allocation base and show the math. An examiner who can follow the calculation moves on.
- Construction timeline. Record the date physical work began on site and the date the building was placed in service. Those dates set the boundaries for interest capitalization and mark when insurance shifts from basis to current expense.
- Change orders and delays. If construction stops for an extended period, document the pause. A clean timeline supports every allocation decision that depends on it.
Developers who keep these records as they go rarely have capitalization disputes get past the initial information request. The ones reconstructing records years later end up negotiating.