General rule for taxable year of deduction

The amount of any deduction or credit allowed by this subtitle shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income. In the case of the death of a taxpayer whose taxable income is computed under an accrual method of accounting, any amount accrued as a deduction or credit only by reason of the death of the taxpayer shall not be allowed in computing taxable income for the period in which falls the date of the taxpayer’s death. If the taxable income is computed under an accrual method of accounting, then, at the election of the taxpayer, any real property tax which is related to a definite period of time shall be accrued ratably over that period. A taxpayer may, without the consent of the Secretary, make an election under this subsection for his first taxable year in which he incurs real property taxes. Such an election shall be made not later than the time prescribed by law for filing the return for such year (including extensions thereof). A taxpayer may, with the consent of the Secretary, make an election under this subsection at any time. In the case of a taxpayer whose taxable income is computed under an accrual method of accounting, to the extent that the time for accruing taxes is earlier than it would be but for any action of any taxing jurisdiction taken after December 31, 1960, then, under regulations prescribed by the Secretary, such taxes shall be treated as accruing at the time they would have accrued but for such action by such taxing jurisdiction. Under regulations prescribed by the Secretary, paragraph (1) shall be inapplicable to any item of tax to the extent that its application would (but for this paragraph) prevent all persons (including successors in interest) from ever taking such item into account. Except as provided in regulations prescribed by the Secretary, amounts paid to, or credited to the accounts of, depositors or holders of accounts as dividends or interest on their deposits or withdrawable accounts (if such amounts paid or credited are withdrawable on demand subject only to customary notice to withdraw) by a mutual savings bank not having capital stock represented by shares, a domestic building and loan association, or a cooperative bank shall not be allowed as a deduction for the taxable year to the extent such amounts are paid or credited for periods representing more than 12 months. Any such amount not allowed as a deduction as the result of the application of the preceding sentence shall be allowed as a deduction for such other taxable year as the Secretary determines to be consistent with the preceding sentence. If— If the taxable income of the taxpayer is computed under the cash receipts and disbursements method of accounting, interest paid by the taxpayer which, under regulations prescribed by the Secretary, is properly allocable to any period— This subsection shall not apply to points paid in respect of any indebtedness incurred in connection with the purchase or improvement of, and secured by, the principal residence of the taxpayer to the extent that, under regulations prescribed by the Secretary, such payment of points is an established business practice in the area in which such indebtedness is incurred, and the amount of such payment does not exceed the amount generally charged in such area. For purposes of this title, in determining whether an amount has been incurred with respect to any item during any taxable year, the all events test shall not be treated as met any earlier than when economic performance with respect to such item occurs. Except as provided in regulations prescribed by the Secretary, the time when economic performance occurs shall be determined under the following principles: If the liability of the taxpayer arises out of— If the liability of the taxpayer requires the taxpayer to provide property or services, economic performance occurs as the taxpayer provides such property or services. If the liability of the taxpayer requires a payment to another person and— In the case of any other liability of the taxpayer, economic performance occurs at the time determined under regulations prescribed by the Secretary. Notwithstanding paragraph (1) an item shall be treated as incurred during any taxable year if— economic performance with respect to such item occurs within the shorter of— either— In making a determination under subparagraph (A)(iv), the treatment of such item on financial statements shall be taken into account. This paragraph shall not apply to any item described in subparagraph (C) of paragraph (2). For purposes of this subsection, the all events test is met with respect to any item if all events have occurred which determine the fact of liability and the amount of such liability can be determined with reasonable accuracy. This subsection shall not apply to any item for which a deduction is allowable under a provision of this title which specifically provides for a deduction for a reserve for estimated expenses. In the case of a tax shelter, economic performance shall be determined without regard to paragraph (3) of subsection (h). In the case of a tax shelter, economic performance with respect to amounts paid during the taxable year for drilling an oil or gas well shall be treated as having occurred within a taxable year if drilling of the well commences before the close of the 90th day after the close of the taxable year. In the case of a tax shelter which is a partnership, in applying section 704(d) to a deduction or loss for any taxable year attributable to an item which is deductible by reason of subparagraph (A), the term “cash basis” shall be substituted for the term “adjusted basis”. Under regulations prescribed by the Secretary, in the case of a tax shelter other than a partnership, the aggregate amount of the deductions allowable by reason of subparagraph (A) for any taxable year shall be limited in a manner similar to the limitation under clause (i). For purposes of subparagraph (B), a partner’s cash basis in a partnership shall be equal to the adjusted basis of such partner’s interest in the partnership, determined without regard to— any amount borrowed by the partner with respect to such partnership which— For purposes of this subsection, the term “tax shelter” means— In the case of the trade or business of farming (as defined in section 464(e)), in determining whether an entity is a tax shelter, the definition of farming syndicate in subsection (k) shall be substituted for subparagraphs (A) and (B) of paragraph (3). For purposes of this subsection, the term “economic performance” has the meaning given such term by subsection (h). If a taxpayer other than a C corporation receives any applicable subsidy for any taxable year, any excess farm loss of the taxpayer for the taxable year shall not be allowed. Any loss which is disallowed under paragraph (1) shall be treated as a deduction of the taxpayer attributable to farming businesses in the next taxable year. For purposes of this subsection, the term “applicable subsidy” means— For purposes of this subsection— The term “excess farm loss” means the excess of— the sum of— The term “threshold amount” means, with respect to any taxable year, the greater of— For purposes of clause (i)(II)— The term “farming business” has the meaning given such term in section 263A(e)(4). If, without regard to this clause, a taxpayer is engaged in a farming business with respect to any agricultural or horticultural commodity— For purposes of subparagraph (A)(i), there shall not be taken into account any deduction for any loss arising by reason of fire, storm, or other casualty, or by reason of disease or drought, involving any farming business. In the case of a partnership or S corporation— The Secretary may prescribe such additional reporting requirements as the Secretary determines appropriate to carry out the purposes of this subsection. This subsection shall be applied before the application of section 469. For purposes of subsection (i)(4), the term “farming syndicate” means— For purposes of paragraph (1)(B), the following shall be treated as an interest which is not held by a limited partner or a limited entrepreneur: For purposes of this subsection, the term “farming” has the meaning given to such term by section 464(e). For purposes of this subsection, the term “limited entrepreneur” means a person who— In the case of a taxpayer other than a corporation— Any loss which is disallowed under paragraph (1) shall be treated as a net operating loss for the taxable year for purposes of determining any net operating loss carryover under section 172(b) for subsequent taxable years. For purposes of this subsection— The term “excess business loss” means the excess (if any) of— the sum of— Deductions for losses from sales or exchanges of capital assets shall not be taken into account under subparagraph (A)(i). The amount of gains from sales or exchanges of capital assets taken into account under subparagraph (A)(ii) shall not exceed the lesser of— In the case of any taxable year beginning after December 31, 2025, the $250,000 amount in subparagraph (A)(ii)(II) shall be increased by an amount equal to— In the case of a partnership or S corporation— The Secretary shall prescribe such additional reporting requirements as the Secretary determines necessary to carry out the purposes of this subsection. This subsection shall be applied after the application of section 469.