Capital improvement is spending to improve a fixed asset. This is normally capitalized such that it can't be immediately expensed. This can be contrasted with routine repair and maintenance of an asset that is treated as a regular expense. The following are illustrative examples of a capital improvement.
Defect or Design FlawFixing a defect or design flaw is a capital improvement. For example, fixing a building that isn't properly insulated or that contains toxic components that need to be removed to improve indoor air quality.
Addition & ExpansionMaking structures or land improvements physically bigger. For example, an addition to a house.
Capacity & EfficiencyIncreasing the productive capacity or efficiency of an asset. For example, increasing the power capacity of a data center with a solar power system.
Rebuilding & Life ExtensionIncreasing the useful life of a fixed asset. For example, replacing the engine of a truck.
ReplacementReplacing a major component such as an elevator in a building.
AdaptationAdapting a fixed asset to a new use. For example, renovations to convert a home into a short term rental property.
Capitalization LimitFirms may choose a capitalization limit whereby any capital spending below a fixed dollar amount is expensed. Likewise, tax authorities may set a capitalization limit for small businesses that don't have audited financial statements. Any capital spending below this capitalization limit is expensed. For example, if your capitalization limit is $2500 and you replace an air conditioner for $2000, it is expensed. Firms must pick a capitalization limit before applicable spending occurs and apply it consistently.
Capital Improvement vs Routine MaintenanceRoutine maintenance is any spending that you can reasonably expect to incur multiple times over the lifespan of a fixed asset. For example, painting the walls in an office or home. The following chart illustrates the difference between capital improvement and routine maintenance.
|Capital Improvement||Routine Maintenance|
|Result||Fix DefectExpandIncrease CapacityImprove EfficiencyIncrease ValueIncrease LifespanAdapt to New Use||Repair DamageMaintain|
|Tax Treatment||If above capitalization limit, cost is deprecated over useful life. If below capitalization limit, cost is expensed.||Expensed|
This is the complete list of articles we have written about business costs.
If you enjoyed this page, please consider bookmarking Simplicable.
© 2010-2023 Simplicable. All Rights Reserved. Reproduction of materials found on this site, in any form, without explicit permission is prohibited.
View credits & copyrights or citation information for this page.