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Unformatted text preview: Business Deductions
Capital Recovery and Depreciation 263: Capitalized Expenditures Section 263(a) provides that no deduction shall be allowed for: Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate; or Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made. Treas. Reg. 1.263(a)1 interprets the language of 263(a): To disallow a deduction for any amount paid or incurred: To add to the value, or substantially prolong the useful life, of property owned by the taxpayer, such as plant or equipment; or To adapt property to a new or different use. But not to disallow a deduction for amounts paid or incurred for incidental repairs or maintenance of property. Capitalized Expenditures (cont'd) Treas. Reg. 1.263(a)2 contains a list of examples of capital expenditures: The cost of acquiring, constructing, or erecting buildings, machinery and equipment, furniture and fixtures, and similar property having a useful life substantially beyond the taxable year; The cost of defending or perfecting title to property; and Commissions paid to acquire securities. Capitalized Expenditures (cont'd) 263A: Uniform Capitalization Rules Section 263A, which was added to the IRC in 1986, supplements 263 and requires the capitalization of all direct and indirect costs relating to: Real or tangible personal property produced by the taxpayer, and Real or personal property that is acquired by the taxpayer for resale and that is stock in trade, includible in inventory, or held by the taxpayer primarily for sale to customers in the ordinary course of business. 263A does not apply to property produced for use other than in a trade or business or an activity conducted for profit. IRS Announcement 20029
"The difficulty of translating general capitalization principles into clear, consistent, and administrable standards has been recognized for decades . . . . Because courts focus on particular facts before them, the results reached by the courts are often difficult to reconcile and, particularly in recent years, have contributed to substantial uncertainty and controversy." Rev Rule 20014 IRS talking about capitalization of expenses surrounding heavy maintenance in the airline industry Commercial airlines are required to do regular heavy maintenance, as long as the maintenance is not used to improve and extend the life of the plane, they can deduct the expenses, otherwise, for improvements, they have to capitalize them Norwest Remodeling bank branch and in the process removed asbestos, even though the asbestos levels were acceptable Removing the asbestos didn't increase the useful life of the building, do they deduct it or capitalize it? Expenses incurred as part of a general plan of rehabilitation are or improvement must be capitalized even if when done separately would be ordinary and necessary IRS says capitalize it Norwest says deduct it ...
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- Fall '06