Service costs
(A) Definition of service costs. Service costs are defined as a type of indirect costs (e.g., general and administrative costs) that can be identified specifically with a service department or function or that directly benefit or are incurred by reason of a service department or function. (B) Definition of service departments. Service departments are defined as administrative, service, or support departments that incur service costs. The facts and circumstances of the taxpayer's activities and business organization control whether a department is a service department. For example, service departments include personnel, accounting, data processing, security, legal, and other similar departments. (ii) Various service cost categories(A) Capitalizable service costs. Capitalizable service costs are defined as service costs that directly benefit or are incurred by reason of the performance of the production or resale activities of the taxpayer. Therefore, these service costs are required to be capitalized under section 263A. Examples of service departments or functions that incur capitalizable service costs are provided in paragraph (e)(4)(iii) of this section. (B) Deductible service costs. Deductible service costs are defined as service costs that do not directly benefit or are not incurred by reason of the performance of the production or resale activities of the taxpayer, and therefore, are not required to be capitalized under section 263A. Deductible service costs generally include costs incurred by reason of the taxpayer's overall management or policy guidance functions. In addition, deductible service costs include costs incurred by reason of the marketing, selling, advertising, and distribution activities of the taxpayer. Examples of service departments or functions that incur deductible service costs are provided in paragraph (e)(4)(iv) of this section. (C) Mixed service costs. Mixed service costs are defined as service costs that are partially allocable to production or resale activities (capitalizable mixed service costs) and partially allocable to non-production or non-resale activities (deductible mixed service costs). For example, a personnel department may incur costs to recruit factory workers, the costs of which are allocable to production activities, and it may incur costs to develop wage, salary, and benefit policies, the costs of which are allocable to non-production activities. (iii) Examples of capitalizable service costs. Costs incurred in the following departments or functions are generally allocated among production or resale activities: (A) The administration and coordination of production or resale activities (wherever performed in the business organization of the taxpayer). (B) Personnel operations, including the cost of recruiting, hiring, relocating, assigning, and maintaining personnel records or employees. (C) Purchasing operations, including purchasing materials and equipment, scheduling and coordinating delivery of materials and equipment to or from factories or job sites, and expediting and follow-up. (D) Materials handling and warehousing and storage operations. (E) Accounting and data services operations, including, for example, cost accounting, accounts payable, disbursements, and payroll functions (but excluding accounts receivable and customer billing functions). (F) Data processing. (G) Security services. (H) Legal services. (iv) Examples of deductible service costs. Costs incurred in the following departments or functions are not generally allocated to production or resale activities: (A) Departments or functions responsible for overall management of the taxpayer or for setting overall policy for all of the taxpayer's activities or trades or businesses, such as the board of directors (including their immediate staff), and the chief executive, financial, accounting, and legal officers (including their immediate staff) of the taxpayer, provided that no substantial part of the cost of such departments or functions benefits a particular production or resale activity. (B) Strategic business planning. (C) General financial accounting. (D) General financial planning (including general budgeting) and financial management (including bank relations and cash management). (E) Personnel policy (such as establishing and managing personnel policy in general; developing wage, salary, and benefit policies; developing employee training programs unrelated to particular production or resale activities; negotiating with labor unions; and maintaining relations with retired workers). (F) Quality control policy. (G) Safety engineering policy. (H) Insurance or risk management policy (but not including bid or performance bonds or insurance related to activities associated with property produced or property acquired for resale). (I) Environmental management policy (except to the extent that the costs of any system or procedure benefits a particular production or resale activity). (J) General economic analysis and forecasting. (K) Internal audit. (L) Shareholder, public, and industrial relations. (M) Tax services. (N) Marketing, selling, or advertising.