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A. Expenses
Taxpayers generally may deduct expenses that are ordinary
and necessary in carrying on a trade or business. Sec. 162(a).
Also, taxpayers generally may deduct expenses that are ordinary
and necessary for (1) the production or collection of income, or
(2) the management, conservation, or maintenance of property held
for the production of income. Sec. 212(1) and (2). Further,
while business expenses and expenses related to income-producing
property are currently deductible, a taxpayer is not entitled to
deduct a capital expenditure; i.e., an amount paid for new
property or for permanent improvements or betterments made to
increase the value of any property or estate.12 Sec. 263(a)(1).
Instead, a depreciation deduction may be allowed if the property
is used in a trade or business or held for the production of
income. Sec. 167; see INDOPCO, Inc. v. Commissioner, 503 U.S.
79, 83-84 (1992). Personal, living, and family expenses, on the
other hand, may not be deducted unless the Internal Revenue Code
expressly provides otherwise; e.g., State and local real property
taxes are deductible pursuant to section 164(a)(1). Sec. 262(a).
The statutory prohibitions of sections 262 and 263 regarding
deductibility of personal and capital expenses take precedence
over the allowance provisions of sections 162 and 212.
12Generally, the cost of acquisition of property having a
useful life substantially beyond the taxable year is a capital
expenditure. Sec. 1.263(a)-2(a), Income Tax Regs.
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