Part 1:

In February, Madison purchases a new machine for use in an existing production line of her manufacturing business for $99,000. Madison pays $2,500 to install the machine. After the machine is installed, she pays $1,500 to perform a critical test on the machine to ensure that it will operate in accordance with quality standards. On March 1, the critical test is complete, and Madison places the machine in service on the production line. On November 5, Madison pays another $5,300 to perform periodic quality control testing after the machine is placed in service.

Required:

What amount must Madison capitalize as the cost of the machine?

Explain why the tax laws require the cost of certain assets to be capitalized and recovered over time rather than immediately expensed.