Federal Tax

Principles of Capitalization (Portfolio 509)

  • The Portfolio, Principles of Capitalization, No. 509, explores the theory and practical application of the fundamental principles determining whether an expenditure may

Description

Bloomberg Tax Portfolio, Principles of Capitalization, No. 509, explores the theory and practical application of the fundamental principles determining whether an expenditure may be currently deducted as an ordinary and necessary business expense or whether instead it must be capitalized and recovered through another tax accounting mechanism, such as depreciation. Other Tax Management Portfolios provide in-depth analysis of the Uniform Capitalization Rules of §263A. This Portfolio instead focuses upon the more traditional capitalization principles underlying §263(a), the decades of case law interpreting those principles, and the government’s recent efforts to rationalize this area through the issuance of regulations.

This Portfolio provides a comprehensive review and analysis of the tax accounting principles underlying the capitalization concept, including the clear reflection of income and matching requirements of §446. The Portfolio applies these theoretical underpinnings in addressing the tax treatment of a wide variety of business expenditures, including the direct and indirect costs incurred to acquire, create, repair and maintain tangible property. The Portfolio also addresses the tax treatment of costs incurred to acquire or create intangible property under the so-called “INDOPCO regulations” as well as costs incurred in connection with various business transactions, including corporate reorganizations. Finally, the Portfolio considers a variety of other expenditures incurred by business taxpayers, including software and website design expenditures, advertising, and business reengineering costs.

For a discussion of the cost recovery of expenditures required to be capitalized under these principles, see Kelly, 530 T.M., Depreciation: General Concepts; Non-ACRS Rules, 531 T.M., Depreciation: MACRS and ACRS, and 532 T.M., First-Year Expensing and Additional Depreciation. For a discussion of the uniform capitalization rules, see 576 T.M., Uniform Capitalization Rules: Inventory; Self-Constructed Assets; Real Estate, and 577 T.M., Uniform Capitalization Rules: Method Change Rules and Special Topics. In-depth coverage of specific topics also can be found in other Portfolios.

Table of Contents

I. Introduction
II. General Capitalization Principles
III. Tangible Property Regulations: Overview
IV. Materials and Supplies
V. Tangible Property — Acquisition or Production Costs
VI. Tangible Property — Improvements
VII. Acquisition or Creation of Intangible Property
VIII. Business Transaction Costs

atkinson-james-2015
James Atkinson
Tax Principal
KPMG LLP
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