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Disallowed LossesThe taxpayer is not allowed to deduct any loss realized on a sale or exchange of property directly or indirectlyto a related taxpayer (as defined above). However, any loss disallowed on the sale may be used to offset gain (ifany) realized on the subsequent sale of the property by a related taxpayer to an unrelated third party.Unpaid Expenses and InterestCode Sec. 267(a)(2) provides that an accrual basis taxpayer can deduct an accrued expense payable to arelated cash basis taxpayer only in the period in which the payment is included in the recipient’s income.¶6785Payment of Another Taxpayer’s ObligationAs a general rule, a taxpayer is not permitted to deduct the payment of expenses incurred by another taxpayer.¶6795Capital ExpendituresA business expense is not deductible in the year paid or incurred if it can be considered a capital expenditure.Rather, capital expenditures may be deducted ratably over the period for which they provide benefits.Capital Expenditures vs. RepairsNo deduction is allowed for betterments made to increase the value of property. Additionally, expendituressubstantially prolonging the property’s useful life, adapting the property to a new or different use, or materiallyadding to the value of the property are not deductible. Reg. §1.263(a)-1(b). Conversely, the cost of incidentalrepairs that do not materially increase the value of the property nor appreciably prolong its life, but maintain it in anormal operating state, may be deducted in the current year.Acquisition CostsAs a general rule, costs related to the acquisition of property must be capitalized. This includes sales taxes,freight, demolition of an existing structure in order to build a new one on the site, title fees, and certain legal feesincurred to recover property.Chapter 6
78CCH Federal Taxation—Comprehensive TopicsBusiness Deductions Related to Capital ExpendituresAllocating the cost of a capital expenditure to various tax periods is accomplished through depreciation,amortization, or depletion depending on the type of capital expenditure involved in the allocation process.¶6801Depreciation of Tangible PropertyDepreciation of tangible property depends on whether the property is real property or personal property. Realproperty is land, land improvements, buildings, and building improvements. Land does not have a limited life;therefore, it does not qualify for depreciation. Personal property is usually business machinery and equipment andoffice furniture and fixtures.Accelerated Cost Recovery System (ACRS)ACRS applies to most tangible property, new or used, placed in service for business or investment purposesafter 1980 and before 1987.Modified Accelerated Cost Recovery System (MACRS)MACRS applies to most tangible property, new or used, placed in service for business or investment purposesafter 1986. The general MACRS rules classify property based on class life for purposes of determining theapplicable depreciation method, the applicable recovery period, and applicable convention.