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Federal Income Tax

Deductions, Expenses, and Capital Expenditures

Deductions, Expenses, and Capital Expenditures

Learn about the general nature of tax deductions, along with how to tell the difference between an expense and a capital expenditure and why the distinction matters.


In this lesson, we'll cover the treatment of taxpayer costs under the Internal Revenue Code, or IRC.

Outlays and Losses

As we've learned, a taxpayer computes taxable income by subtracting allowable deductions from gross income. Under the IRC, each deduction relates to either an outlay or a loss. The only deductible outlays are those the IRC expressly makes deductible. All others are nondeductible. See 26 U.S.C. § 161; White v. United States, 305 U.S. 281 (1938). Most ordinary business...