Abstract The federal income tax laws and regulations allow a certain latitude for businessmen to either capitalize or expense certain expenditures. One major area where such a latitude exists is repairs. When a company makes an expenditure for repairs which could be either capitalized or expensed without forseeable objection from the Internal Revenue Service, then a capitalize-expense decision must be made by management which will optimize profits. When an expenditure has been made which falls within a discretionary area for income taxes (e.g., it may be expensed or capitalized) a decision which maximizes the tax savings over time is desired. In general, the analysis will be the same as that used to determine the optimal depreciation policy for capitalized expenditures. In most practical situations salvage value on a particular asset is of no great concern. The revenue code allows the tax payer to reduce the amount of salvage by 10% of the cost of the depreciable property. Since most items of expenditure do not involve salvage values in excess of 10% of cost, salvage value presents no problem.
Morrison et al. (Mon,) studied this question.