How to Handle Capital Expenses

An overview of capital expenses

At Miller Bernstein, we frequently work with clients who have significant capital expenses. These are payments for fixed assets like equipment, machinery and buildings, incurred to create some future benefit; they do not relate to the day-to-day operation of a business. While it may seem straightforward on the surface, it can sometimes be very complicated to determine how these expenses should be handled.

Usually, capital expenses are recorded in an account that is classified as ‘Property, Plant and Equipment’. The cost is then charged to depreciation expenses over the useful lifetime of the asset.

That said, there are certain circumstances that influence the way in which capital expenses should be handled. We have addressed some of those here.

Purchasing an older building

If you purchase an older building that is in need of renovation, to make it suitable for use or rent, the costs associated with this work are considered to be capital expenses. Rather than treating them as ‘current expenses’ (as would normally be the case in a more modern building), they can be treated as capital expenses.

Accommodations for Persons with Disabilities

If you renovate your existing property to accommodate persons with disabilities, you can deduct those expenses for eligible disability-related modifications, instead of having to add them to the capital cost of your building.

The types of renovations that would qualify include:

  • The addition of interior or exterior ramps
  • Modifications to bathrooms, doorways or elevators (to make them wheelchair accessible)
  • The installation of hand activated door openers

Certain types of equipment also qualify for deduction, including:

  • Visual fire alarm indicators
  • Visual listening devices for people with hearing impairment
  • Computer software or hardware that is disability-specific

Selling your property

If you decide to sell your property, and you need to undertake renovations or repairs in order to do so (either as a condition of the sale, or to expedite the sale), they are considered to be capital expenses.

Nonetheless, if these same repairs were required before you decided to sell the property, they would be considered current expenses and would have to be handled accordingly.

If you have capital expenses that need to be handled in a special way, or you are uncertain about how to deal with them, contact us for a free consultation (link).


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