Expenses vs Capital Investment

Some purchases are easy to identify as expense items or capital investments, such as buying a new building to locate your business. Other items, such as new smartphones for your sales staff, may offer either-or options as business expenses or capital purchases.

IRS regulations often influence the way you recognize spending on your company’s books and records. At times you have options to expense or capitalize spending; other situations mandate classifying your spending as one or the other.

Capital Expenditures

  • Purchasing items that benefit your business for over one taxable year, such as company vehicles.
  • Buying assets with useful lives longer than one year, such as new computer hardware.
  • Making improvements that extend the useful life of an asset, such as renovations to your office.
  • Modifications that provide different uses for assets, such as spending to renovate a vacant warehouse that morphs it into an elegant company headquarters.

Expenses

  • Lower cost items that may or may not be useful longer than one year. For example, tablet computers, that may or may not be obsolete in one tax year, because of technological advances.
  • Necessary spending to use capital assets, such as costs for fuel, maintenance and repairs for company vehicles.

In most cases consistency is the best policy. Your business planning should clearly state your policy. For example, you decide that purchasing items costing $500 or less will be expensed. Your plans include maximizing your EBITDA (earnings before interest, taxes, depreciation and amortization) by capitalizing items costing over $500.

The Carleton Group can help you formulate your operating plans and strategies. As a top management consulting firm, The Carleton Group can help you organize and adopt the best expense vs capital investment strategy for your business. Contact them now to get their advice for your situation.