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THE UNITED STATES TAX SYSTEM: AN OVERVIEWThe resulting minimum tax is an additional tax liability resulting from addingback certain tax preferences that reduced the taxpayer’s initial tax liability.Not all expenses are currently deductible to taxpayers. When an asset isexpected to have a useful life that will extend substantially beyond the currenttaxable year, the federal tax law denies a deduction and requires capitalizationof the expenditure. 96 The underlying concept of this rule is that it would beunfair to permit a taxpayer to receive the benefit of a current deduction for anasset that will provide economic utility over a period of years. Examples ofassets with long useful lives are:• Land• Buildings• Plants and equipment• Patents• GoodwillThe cost of these types of assets must be capitalized rather than fully deductedin the tax year of acquisition.§ 2.19 DEPRECIATIONOne method for recovering the capital invested in long-lived assets is depreciation.A depreciation deduction is allowed for the reasonable exhaustion, wear and tear,and obsolescence of property held for investment or used in trade or business. 97Generally, an amount of the purchase price is deducted each year as a portion ofthe total acquisition cost. The total depreciation, and the period of depreciation, aremeant to approximate the value of the asset over its useful life. Some assets aredepreciated over a period that is shorter than their expected life. 98 This accelerateddepreciation is designed to encourage investment in certain assets.As an example, an asset is purchased for $1,000. It has an expected useful lifeof five years. At the end of its useful life, it is expected to not have any remainingvalue, not even salvage value. Under the straight-line method of depreciation,an equal amount is to be deducted each year over the life of the asset. In otherwords, depreciation is ratable. Here, $200 is deducted each year for five years.The depreciation recapture rules in the federal tax law are designed to preventthe conversion of ordinary income into capital gains. The federal tax law requirestaxpayers to recapture prior depreciation deductions and convert what might otherwisebe capital gains into ordinary income. The federal tax law contains a numberof provisions that accomplish recapture. The most important provisions are therecapture of depreciation on real property and on personal property.§ 2.20 TAX CREDITSDeductions against income have the effect of a tax savings. Depending on themarginal rate of a taxpayer, every dollar of a deduction results in a tax savings of96 IRC § 263.97 IRC § 167.98 IRC § 168. 52