What Are Capital Improvements?
Though you might not know it, when you add a structure that enhances the value of an asset, you have carried out a capital improvement. Replacements and upgrades that extend an asset's lifespan also count as capital improvements. (see Reference 1) Individuals, governments and businesses can carry out capital improvements. Capital improvements mean tax breaks for homeowners, an investment for businesses and a chance for citizens to enjoy better services.
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Classification by Cost
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If the idea of making some changes to your home to make it better appeals to you, remember that a capital improvement will only be considered such because of its cost. For example, changing a light bulb does not count as a capital improvement. In contrast, installing a new lighting fixture, which requires rewiring the building and plastering ceilings, falls into the capital improvement category. Capital improvements represent a substantial investment into the improvement of an asset. (see Reference 2)
Time
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Time factors into the definition of capital improvement as well. In addition to adding substantial value to an asset, a capital improvement can also be carried out to prolong an asset's lifespan. A new roof, window, air-conditioning system and generators all extend the life of an asset. The capital improvement must have a useful life of more than one year, meaning it cannot be an improvement that will last for only six months. Because of the high cost of capital improvements, accountants can spread their cost over more than one tax year. (see Reference 2)
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Tax Breaks
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For households, capital improvements yield tax breaks. IRS regulations allow homeowners to add capital improvement expenses to the cost basis of their homes. A home's cost basis refers to its original value to calculate the profit you have earned from it. (see Reference 5) The IRS calls profits "capital gains," and a higher cost basis will lower your capital gain when you sell a home that has undergone capital improvements. According to the IRS, a capital improvement maintains the home's good condition. So, the IRS would consider replacing the home's windows as a capital improvement, but not fixing a broken window pane. (see Reference 4)
Competitive Advantage
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Companies that carry out capital improvements to their facilities will discover they have an advantage over the competition. In 2010, the Sonoco-Alcore Company announced it would be implementing capital improvements in its paper mills in Greece and Italy. The company believed that investing in these improvements would increase its output, reduce its energy costs and make its machines run better. (see Reference 6) Higher output, lower energy costs and better running machines all contribute to savings, which can be passed along to the customer. Smart companies undertake capital improvements to stay ahead of the competition.
Quality of Life
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Capital improvements carried out on the state or federal levels improve the quality of life for citizens. Many states and communities have developed Capital Improvement Plans (CIP). A CIP represents the community or state's long-term plan to preserve and improve its most important assets. Capital improvements include massive overhauls of roads, renovating a publicly run senior citizens' facility or preserving a historical monument. States and communities have an obligation to their residents to provide a safe, healthy living environment, and capital improvements ensure they fulfill this duty. (see Reference 3)
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References
- Businessdictionary.com: Capital Improvement.
- The Co-operator: Defining Your Capital Improvement Project. Greg Olear.
- What Is Capital Improvement Planning and Why Should We Do It?
- Houselogic: Tax Breaks on Capital Improvements to Your Home. Donna Fuscaldo.
- Businessdictionary.com: Cost Basis.
- Business Wire: Sonoco-Alcore Implementing Capital Improvements to Paperboard Mills in Italy, Greece.
Resources
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