Tax Issues of Capital Expenditure
Your business expenditures for capital goods have a different tax treatment than ordinary operating expenses. This requires special record-keeping for accurate tax deduction of capital expenditures.
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Capital Expenditure Defined
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Capital expenditures must be related to an income-producing activity.
Depreciable capital goods are property that wears out or becomes obsolete over a useful life of more than 1 year.
Some property, such as land, cannot be depreciated.
Small items are considered ordinary business costs and not capital goods. For example, large machinery is a capital expenditure but a paperclip is not.
Basis
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Tax-deductible depreciation of capital expenditures is determined by basis in the property. The basis is cost for the property plus amounts associated with placing the property into business use, such as installation and freight charges.
Purchasing capital goods on credit instead of with cash has no effect on determining basis and calculating deprecation. Basis includes any part of the cost financed by debt.
The basis in property you have for personal use that is converted to business use is the lesser of your cost or the fair market value of the property at the time of conversion.
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Useful Life
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Depreciation of capital expenditures begins at the time property is placed in service for business use.
Depreciation of capital goods is based upon methods established in the tax code. The number of years used to calculate depreciation depends upon a category for the type of capital good.
An amount is established annually by tax statute for capital expenditures that may be fully deducted in the acquisition year. This deduction under Section 179 of the tax code substitutes for regular depreciation over several years.
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References
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