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in your business. In general, you capitalize three types of costs. • Business start-up costs (see Tip below). • Business assets. • Improvements. You can elect to deduct or amortize certain business start-up costs. See chapters 7 and 8. Cost recovery. Although you generally cannot take a current deduction for a capital expense, you may be able to recover the amount you spend through depreciation, amortization, or depletion. These recovery methods allow you to deduct part of your cost each year. In this way, you are able to recover your capital expense. See Amortization (chapter 8) and Depletion (chapter 9) in this publication. A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduc- tion. A greater portion of these costs can be de- ducted if the property is qualified disaster assis- tance property. See Pub. 946 for details. Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. These costs may include ex- penses for advertising, travel, or wages for training employees. If you go into business. When you go into business, treat all costs you had to get your business started as capital expenses. Usually, you recover costs for a particular asset through depreciation. Generally, you can- not recover other costs until you sell the busi- ness or otherwise go out of business. However, you can choose to amortize certain costs for setting up your business. See Starting a Busi- ness in chapter 8 for more information on busi- ness start-up costs. If your attempt to go into business is un- successful. If you are an individual and your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories. 1. The costs you had before making a deci- sion to acquire or begin a specific busi- ness. These costs are personal and non- deductible. They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. 2. The costs you had in your attempt to ac- quire or begin a specific business. These costs are capital expenses and you can deduct them as a capital loss. If you are a corporation and your attempt to go into a new trade or business is not success- ful, you may be able to deduct all investigatory costs as a loss. The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. You can- not take a deduction for these costs. You will re- cover the costs of these assets when you dis- pose of them. TIP Business Assets There are many different kinds of business as- sets, for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. You must fully capitalize the cost of these as- sets, including freight and installation charges. Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. See Regulations section 1.263A-2 for information on these rules. De Minimis Safe Harbor for Tangible Property Although you must generally capitalize costs to acquire or produce real or tangible personal property used in your trade or business, such as buildings, equipment, or furniture, you can elect to use a de minimis safe harbor to deduct the costs of some tangible property. Under the de minimis safe harbor for tangible property, you can deduct de minimis amounts paid to ac- quire or produce certain tangible business prop- erty if these amounts are deducted by you for fi- nancial accounting purposes or in keeping your books and records. See the following for the re- quirements for the de minimis safe harbor. You have an applicable financial statement. If you elect the de minimis safe harbor for the tax year, you can deduct amounts paid to ac- quire or produce certain tangible business prop- erty if: • You have a trade or business or are a cor- poration, partnership, or S corporation that has an applicable financial statement; • You have, at the beginning of the tax year, written accounting procedures treating as an expense for nontax purposes:

– Amounts paid for property costing less than a certain dollar amount, or

– Amounts paid for property with an economic useful life of 12 months or less; • You treat the amount paid during the tax year for which you make the election as an expense on your applicable financial state- ments in accordance with your written ac- counting procedures; • The amount paid for the property does not exceed $5,000 per invoice (or per item substantiated by invoice); and • The uniform capitalization rules do not ap- ply to the amount. You do not have an applicable financial statement. If you elect the de minimis safe harbor for the tax year, you can deduct amounts paid to acquire or produce certain tangible busi- ness property if: • You have a trade or business, partnership, or S corporation that does not have an ap- plicable financial statement; • You have, at the beginning of the tax year, accounting procedures treating as an ex- pense for nontax purposes:

– Amounts paid for property costing less than a certain dollar amount, or

– Amounts paid for property with an economic useful life of 12 months or less; • You treat the amounts paid for the property as an expense on your books and records in accordance with your accounting proce- dures; • The amount paid for the property does not exceed $2,500 per invoice (or per item substantiated by invoice); and • The uniform capitalization rules do not ap- ply to the amounts. How to make the de minimis safe harbor election. To elect the de minimis safe harbor for the tax year, attach a statement to the tax- payer’s timely filed original tax return (including extensions) for the tax year when qualifying amounts were paid. The statement must be ti- tled “Section 1.263(a)-1(f) de minimis safe har- bor election” and must include your name, ad- dress, taxpayer identification number (TIN), and a statement that you are making the de minimis safe harbor election under section 1.263(a)-1(f). In the case of a consolidated group filing a con- solidated income tax return, the election is made for each member of the consolidated group. In the case of a consolidated group filing a consolidated income tax return, the election is made for each member of the consolidated group. In the case of an S corporation or a part- nership, the election is made by the S corpora- tion or the partnership and not by the share- holders or partners. The election applies only for the tax year for which it is made. Example. In 2018, you do not have an ap- plicable financial statement and you purchase five laptop computers for use in your trade or business. You paid $2,000 each for a total cost of $10,000 and these amounts are substanti- ated in an invoice. You had an accounting pro- cedure in place at the beginning of 2018 to ex- pense the cost of tangible property if the property costs $2,000 or less. You treat each computer as an expense on your books and re- cords for 2018 in accordance with this policy. If you elect the de minimis safe harbor in your tax returns for your 2018 tax year, you can deduct the cost of each $2,000 computer. Improvements Generally, you must capitalize the costs of mak- ing improvements to a business asset if the im- provements result in a betterment to the unit of property, restore the unit of property, or adapt the unit of property to a new or different use. Some examples of improvements include rewiring or replumbing of a building, replacing an entire roof, increasing the production output of your equipment, putting an addition on your building, strengthening the foundation of a building so you can use it for a new purpose, or replacing a major component or substantial structural part of a machine. However, you may currently deduct the costs of repairs or maintenance that do not im- prove a unit of property. This generally includes the costs of routine repairs and maintenance to your property that result from your use of the property and that keep your properly in an ordi- nary efficient operating condition. For example, deductible repairs include costs such as Page 4 Chapter 1 Deducting Business Expenses