To Capitalize or Expense



The Internal Revenue Code has long generally required the capitalization of expenditures to acquire, produce or improve tangible property. This means that instead of “writing off” an amount in the year it is bought, your business must treat it as a depreciable asset and write it off over a period of time, depending on the nature of the asset.

Naturally, the IRS had regulations which attempted to define the difference between these “capital” and “non-capital” expenditures. Equally, there has been argument between those who pay taxes and those who collect them over this issue—even though an asset is usually going to be deductible one way or the other:  all at once or over a period of time, usually the quicker it is deducted the later the business pays tax, and the later it is deducted the sooner the IRS gets to collect tax. And either way, the timing of when the deduction is taken may cost or save tax.

After long study and consideration, issuance of temporary regulations and, rumor has it, actually involving taxpayer feed
back, the IRS has finally issued “final regulations” which are generally in effect for tax years beginning on or after January 1, 2014.