Write a Tax Research Memo

You are a staff accountant, and your boss Ernie Waterhouse has a question for you to research. The firm’s client Bluegrass manufacturing would like to establish a policy on capitalizing versus expensing purchases.

Presently, the accounts payable department codes invoices as expense or capital items and there isn’t any consistency. This year our firm had several audit adjustments to reclassify items that had been expensed. For financial statement purposes we can comfortably establish a level of materiality however, what can be done for tax purposes? Will the IRS accept a set dollar threshold for determining expensing versus capitalization?

Prepare a research memo (see attached document for format). Provide citation of primary authority, (end notes are preferred).

Hint: Reg. § 1.263(a)-1

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