Explain when an expenditure should be capitalized based upon accounting principles. From time to time, it...

Explain when an expenditure should be capitalized based upon accounting principles. From time to time, it is suggested that all business expenditures should be deducted when incurred for tax purposes. Do you agree with this proposition, and if so, why?
In addition, can an individual take a medical deduction for a capital improvement to his or her personal residence? If so,how is it calculated?

Expert Solution

As per the principles of accounting, an expenditure should be capitalized when there is a certainty of benefits from the expenditure incurred in two different accounting periods. The cost element of expenditure is than bifurcated between the accounting periods through Depreciation or any Amortization. Now comes the rules of Taxation which is different from the perspective of principles of accounting. Here comes the matching principle for any expenditure incurred, should be recognized in that year where revenues are generated from that expenditure.

The proposition that to expense all the expenditures related to business is usually defended on the grounds of simplification, encouraging capital investment, and lack of bias (at least over the long run) and criticized on the grounds of potential economic bias (at least within the short run) and revenue loss by the govt.

Yes, an individual can take a medical deduction for a capital improvement to his or her personal residence provided it must be intended to be used for medical purposes.

To calculate, deduct the amount of cost in excess of increase in Fair Market value, only if it is greater than Fair Market Value.

ekkarill92 answered 2 years ago

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