Why bother distinguishing between capital and current expenses?
Most business expenses are tax deductible if the business is operated to make a profit. However, establishing whether a cost is a current or capital expense allows a taxpayer to determine when they are eligible to take a federal tax deduction on that expense. Section 162 of the Internal Revenue Code gives businesses a current tax deduction for all ordinary and necessary expenses incurred in carrying out a trade or business. Section 162 allows the total cost of the expense to be deducted from the business’s gross income in the year the expense was incurred. Capital expenditures, on the other hand, are not treated as “ordinary and necessary” business expenses and are not eligible for a current deduction under Section 162. Capital expenses may, however, be deducted through a process of depreciation, amortization or depletion. This means that rather than being deducted in the year the expense was incurred, the expense is deducted over a number of years. The precise number of years and the
