- 7 - interpreting the section further specify that vehicle operating costs and insurance premiums are among the items that may qualify as ordinary business expenses. Sec. 1.162–1(a), Income Tax Regs. On the other hand, section 263(a), entitled Capital Expenditures, mandates: “No deduction shall be allowed for--(1) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate.” Regulations then offer the following explanatory examples: “The cost of acquisition, construction, or erection of buildings, machinery and equipment, furniture and fixtures, and similar property having a useful life substantially beyond the taxable year.” Sec. 1.263(a)-2(a), Income Tax Regs. The significance of classifying any given expense as either ordinary or capital lies in the contrasting tax treatments mandated by the label affixed. As expounded in a recent Supreme Court analysis of the two sections, “The primary effect of characterizing a payment as either a business expense or a capital expenditure concerns the timing of the taxpayer’s cost recovery: While business expenses are currently deductible, a capital expenditure usually is amortized and depreciated over the life of the relevant asset”. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 83-84 (1992). The purpose of the sections is “to match expenses with the revenues of the taxable period to which they are properly attributable, thereby resulting in a more accuratePage: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Next
Last modified: May 25, 2011