Ernst & Young Tax Guide 2018, 33rd Edition

Chapter 48 Rules for expensing and capitalizing tangible property used in a trade or business

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Introduction

This chapter explains the general rules on expensing acquisitions, improvements, repairs, and dispositions of tangible property used in a trade or business.

Overview

Section 162 of the Internal Revenue Code allows you to deduct all the ordinary and necessary expenses you incur during the tax year in carrying on your trade or business, including the costs of certain materials, supplies, repairs, and maintenance. However, Section 263(a) requires you to capitalize the costs of acquiring, producing, and improving tangible property, regardless of the size or the cost incurred.

The tax law has long required you to determine whether amounts paid or incurred (i.e., spending) related to tangible property are currently deductible business expenses (governed by Section 162) or nondeductible capital expenditures (governed by Section 263(a)). Before the IRS issued final tangible property regulations (“TPR”) on September 17, 2013, these decisions were guided by decades of often-conflicting case law, as well as administrative rulings on specific factual situations.

The regulations combine the case law and other authorities into ...