J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

40.8 Nondeductible Expense Items

Capital expenditures may not be deducted. Generally, the cost of acquiring an asset or of prolonging its life is a capital expenditure that must be amortized over its expected life. If the useful life of an item is less than a year, its cost, including sales tax on the purchase, is deductible. Otherwise, you generally may recover your cost only through depreciation except to the extent first-year expensing applies (42.3). IRS regulations provide safe harbors, including a “12-month” rule, for expenditures relating to intangible assets or benefits (40.3).

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Caution

Penalties and Fines

Penalties or fines paid to a government agency because of a violation of any law are not deductible. You may deduct penalties imposed by a business contract for late performance or nonperformance.

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EXAMPLE

A new roof is installed on your office building. If the roof increases the life of the building, its cost is a capital expenditure recovered by depreciation deductions. The cost of repairing a leak in the roof is a deductible operating expense. In several decisions, the Tax Court has allowed a deduction for the cost of a major roof renovation or replacement on evidence that the work was not designed to increase the value of the building but to prevent leaks and keep the property in working condition.

Expenses while ...