This Article explores an economic model of the business use of assets that supports an expectations approach to distinguishing between immediately deductible repairs and capitalized improvements. Under an expectations approach, the classification of an activity as a repair or a capital improvement depends on the taxpayer’s reasonable expectation when first placing the depreciable property in service—whether, upon acquisition of the property, the taxpayer reasonably expected the activity to be required in the future to keep the property operating in its ordinarily efficient operating condition. Many of the rules provided by the new regulations are consistent with this approach. The inconsistent provisions can present problems. Section II of this Article provides a background of deductible repairs and capital improvement. After a brief overview of the purpose for distinguishing deductible repairs from capitalized improvements, this Article begins with an introduction to the expectations approach. An economic analysis that provides a basis for an expectations approach follows. In Section III, this underlying economic theory is used to evaluate whether the new regulations fully implement an expectations approach, leave any gaps, or otherwise create inconsistencies. In particular, this Article compares the regulations’ application both to an asset that performs as originally expected and to an asset that does not so perform. Section IV concludes.

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