374 INCOME TAXES
Expenditures for depreciable assets:When facilities or productive equipment with
useful lives in excess of one year are acquired, the taxpayer will recover his in-
vestment through depreciation charges.4Chapter 11 examined in great detail the
several ways in which the cost of the asset could be allocated over its useful life.Expenditures for nondepreciable assets:Land is considered to be a nondepreciable
asset, for there is no finite life associated with it. Other nondepreciable ~sets
are propertiesnotused either in a trade, in a business, or for the production of
income. An individual's home and automobileare generally nondepreciableassets.
The final category of nondepreciable assets are those subject todepletion,rather
thandepreciation.Since business firms generally acquire assets for use in the
business, their only nondepreciable assets normally are land and assets subject to
depletion.All other business expenditures:This category is probably the largest of all, for it in-
cludes all the ordinary and necessary expenditures of operating a business. Labor
costs, materials, all direct and indirect costs, and facilities and produ~tiveequip-
ment with a useful life of one year or less are part of the routine expenditures.
They are charged as a businessexpense-expensed-when they occur.Business expenditures in the first two categories-that is, for either depreciable or
nondepreciable assets-are called capital expenditures. In the accounting records of the
firm, they are capitalized; all ordinary and necessaryexpenditures in the third category are
expensed.Taxable Income of Business Firms
The starting point in computing a firm's taxable income isgross income.All ordinary and
necessary expenses to conduct thebusiness-except capital expenditures-are deducted
from gross income. Capital expenditures maynotbe deducted from gross income. Except
for land, business capita! expenditures are charged to expense period by period througb;
depreciation or depletion charges.
For business firms, taxable income is computed as follows:Taxable income =Gross income
- All expenditures except capital expenditures
- Depreciation and depletion charges (12-2)
Because of the treatment of capital expenditures for tax purposes, the taxable income of a
firm may be quite different from the actual cash results.4There is an exception. In 2003, businesses may immediately deduct (expense) up to $25,000 of
business equipment (via the Section 179 Business Deduction) in a year, provided their total equipment
expenditure for the year does not exceed $200,000. Between $200,000 and $224,000 in qualifying
179 Property the dollar limit is reduced by the amount over $200,000. Above $224,000 a Section 179
deduction cannot be taken.