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This post addresses South Western federal taxation exercises

Capitalization versus Expensing.
Joe carter owns 15 apartment buildings. During the year, Joe replaced the carpeting in many of the apartments because the costs associated with replacing the carpeting are relatively small in comparison with the gross rents, Joe is considering expensing the costs are repairs and maintenance.

- Discuss the key factors that should be considered when determining whether an item should be expensed.
- Speculate how Joe Carter arrived at his decision to expense the carpets replaced in the apartments.
- Explain whether or not you agree with his decision.

Business Expense or Start-Up Expense?
Mark works as a writer for a local newspaper. Ten years ago he wrote a book about gardening. The book was a moderate success, and he ended up making about $15,000 from sales of the book. During the current year, mark had $20,000 of expenses in correction with writing a book dealing with soccer. The expenses were for travel, meals, lodging, and research. Mark is considering expensing these items in the current year as trade and business expenses rather than capitalizing and amortizing them as startup expenses.
- Evaluate the appropriateness of Mark'f s plan.
- Discuss any future consequences to Mark related to the tax treatment of the expenses.

Solution Preview

- Discuss the key factors that should be considered when determining whether an item should be expensed.

The main key factor is the value of the asset, and how it adds to the value of the operation for which it is used. In this case, we have the carpeting as the asset, and the carpeting adds to the value of the rental building. The carpeting is not intended for the care or maintenance of the rental building, but rather to increase the value of the building. Joe replaced the carpeting in several units because the cost of replacing the carpeting was small in comparison with gross rent, which doesn't directly affect the choice between capitalization and expensing. We could make this assumption about any operation. Rarely would a manufacturing plant buy a new machine that is worth more than the total amount of money they collect in revenue. To expense an item, as Joe is considering, would mean that he believes the asset is being used as routine repair, and in ...

Solution Summary

The solution provides complete details for each exercise presented regarding capitalization versus expensing and business expenses or start-up expenses.