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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 accurate
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Last modified: May 25, 2011