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One of the principles underlying the tax rules for deductions is that your income for the year should be offset by only those expenses that contributed to earning that income.
It may seem as though this shouldn't really be a problem, because everything would come out even in the end. However, what would have happened from the government's perspective is that you would have reduced your taxable income inappropriately in the year of acquisition and deferred the payment of some income taxes, which is not something the IRS usually likes to allow.
So, instead of letting you currently deduct your outlay for items of a more permanent nature (that is, items that will benefit your business beyond the current year), the tax rules provide that such expenditures generally must be capitalized.
What does it mean to "capitalize" an expense? Well, apart from the fact that it means the expense is not fully deductible this year, the act of capitalizing an expense is just an exercise in bookkeeping. The asset becomes a capital asset, against which you can take depreciation deductions each year.
For now, let's just say that for tax purposes, you'll eventually recover the benefits of a capital expense through
Although these two results are helpful, they are usually not as good as a current deduction in full for the expenses paid. Unfortunately, you normally won't have a choice as to how to treat a given expense. With certain exceptions, the tax rules specify whether an expense must be capitalized or is deductible.