Many businesses capitalize expenditures. However, this is done only with high-priced items such as vehicles, machinery, or buildings that are considered property. These items are considered of value to the company for a long period of time.
When an item is capitalized, the value of the item is placed in an asset, which increases the value of the company. This is because these items are considered to lose their value slowly or, as in the example of land, increase over time. The asset is given a number for tracking purposes and is listed on the company's property tax inventory. The company is billed yearly for taxes based on the value of its assets. The listing of a depreciating asset goes down in value each year until it is considered to have no value.
Items that are capitalized are allowed to be depreciated over a period of time, such as three, five or even 15 years. When an item is depreciated, the full cost of the item is not shown in expenses at one time, but is divided over several years. This keeps the net income of the company from being affected too negatively at any one time.
Reason for Depreciation Length
The time period for depreciating a capitalized item is based on how long the item is thought to last. Properties such as land are usually depreciated out over several decades, whereas items such as vehicles are normally depreciated out over three or five years, depending on the cost. See the Resources section for a link to the IRS rules that govern depreciation expenses,