TAX RESEARCH MEMO
January 25th, 2015
The Pima and Southern Railroad (PSRR) needs to replace a 30 mile section of its track. The PSRR has bids from a contractor to replace the track for the following amounts:
Cost of new track
Installing new track
Road bed grading and improvements
Removing old track ( net of salvage)
The old track is fully depreciated, and the cost shown is net of $200,000 salvage value received for the scrap metal. The new track is expected to last 3540 years.
Out of the above figures, are there any costs that can be deducted on PSRR’s tax return or can all costs be capitalized and written off over a period of years?
§263 outlines that certain direct and indirect costs are nondeductible and must be capitalized. §§263 and 1.263(a)1(a), document that no deduction is allowed for capital expenditures that are associated with the improvement or betterment of property. §1.263(a)2(a) notes that capital expenditures include constructing, building, improvements, and developing done on any property produced by the taxpayer for use in its trade or business. §263 further outlines that while direct costs are to be capitalized, indirect costs that are capable of being allocated to the property are properly done so. In addition to indirect costs not being capitalized, the costs associated with the removal of the old track are not required to be capitalized. According to Revenue Ruling 20007, the removal costs of the tracks are allocable to the tracks themselves, and the costs associated with the removing of the tracks are directly associated to the retiring of the old tracks. When retiring an asset, the costs associated are generally tax deductible when the costs are incurred.
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