Exam (elaborations)
TAX 4001 Assessment-Ch 7 (1)
TAX 4001 Assessment-Ch 7 (1)
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TAX 4001 Assessment-Ch 7LO 07-01: Decide if a business expenditure should be deducted or capitalized - ANS-LO
07-01: Decide if a business expenditure should be deducted or capitalized
financial cost of resources as part of revenue generating activities are reduced by -
ANS-any tax savings
tax savings are usually maximized if - ANS-deductible in the current year
PV of tax savings decreases if - ANS-firm must capitalize & postpone deduction
Capitalization - ANS-expenditure is recorded as an asset on balance sheet
if never allowed any tax deduction, then after tax cost = - ANS-before-tax cost
basic premise regarding expenditure deductions - ANS-no expenditure is deductible
unless authorized by IRC
IRC allows to deduct - ANS-all ord and necc exp paid or incurred during the tax year in
carrying on any trade or business
deduct routine operating expenses in - ANS-year incurred under firm's method of
accounting
IRC prohibits deductions for_____ but allows____ - ANS--permanent improvements or
betterments made to incr value of any property
-firms to recover some in form of future deductions
in cash flow terms, future deductions are _________ current deduction - ANS-worth
less than
firms minimize costs of operations by - ANS-deducting expenditures as soon as
possible
if the expenditure creates or enhances distinct asset w/ useful life substantially beyond
current year - ANS-expenditure must be capitalized
, if the expenditure DOES NOT create or enhance a specific asset, expenditure must be
capitalized if - ANS-it results in a significant long-term benefit to the firm
If tax treatment of an expenditure is uncertain, _____ is the norm, while ____ is the
exception - ANS-capitalization
deductibility
expenses related to raising capital or reorganizing a firm's capital structure _________
and therefore ________ deductible - ANS--benefit the firm for the duration of its
existence
-are not deductible
corporations (do or do not?) recognize gain on the receipt of cash in exchange for stock
- ANS-do not
repair and maintenance costs that are regular and recurring in nature and do not
materially add to either the value or the useful life of an asset are - ANS-deductible
Expenditures that substantially incr value of an asset or useful life of an asset are -
ANS-nondeductible capital improvements
the expense of adapting an asset to a new or different use must be - ANS-capitalized to
the cost of the asset
Per IRS, environmental cleanup costs should be - ANS-capitalized
September 2013 final regulation issued by IRS provided safe harbors permitting
deductibility of (3) - ANS-1) de minimis expenditures
2) routine maintenance
3) certain building improvements by qualifying small taxpayers
De Minimis Expenditures - ANS-deduction for expenses not exceeding a per-item
amount
building improvement deductions - ANS-may deduct cost of improvements, not to
exceed the lesser of (a) 10,000 or (b) 2% of the buildings unadjusted basis
preferential tax rules - ANS-special rules permitting firms to deduct expenditures that
are clearly capital in nature
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