Ever wonder if your expenses need to be capitalized or can be written off in the current period?
Capital vs Expense
General rules regarding whether an item should be capitalized (capital expense) or can be expensed (current expense):
When a cost is incurred to acquire a new asset, not as a replacement for a failed asset, and the asset is of an "enduring nature" (i.e., will not have to be regularly replaced), the cost is capitalized.
If a repair is incurred in order to resell the property, this is not deductible as an expense, and must be capitalized. This is true even if this type of repair would normally be expensed.
When a property has just been acquired, usually any costs incurred in order to get the property into usable condition would be capitalized.
When a repair is incurred in order to acquire a new tenant this would normally be expensed, not capitalized.
When a repair is required due to wear and tear, the cost is normally deductible as an expense.
When fixtures such as toilets and sinks, i.e., things that become a part of the building once installed, are replaced due to normal wear and tear, this would normally be a deductible expense. However, if these things are replaced in order to upgrade to something of better quality or performance, not because of wear and tear, this would normally be capitalized.
CRA indicates the following criteria should be used when determining if an expense is a capital expense or a current expense:
Determine if the expense provides a lasting benefit.
If it provides a lasting benefit, or extends the useful life of the property, it is capitalized. Example: putting vinyl siding on the exterior of a wooden or stucco house.
If the expense recurs after a short period of time, it is expensed. Example: painting the interior or exterior of a house.
Determine if the expense maintains the property, or improves the property.
If the property is repaired and improved to better than its original condition (when it was new), then the expense is capitalized. Example: replacing wooden steps with concrete ones.
If the property is merely restored to its original condition, the cost is expensed in the current period. Example: replacing a worn-out roof with a roof of similar materials.
Determine if the expenses are for a part of the property, or are they separate from the property.
For replacement of assets that are separate from the building, the cost would normally be capitalized. Examples: refrigerators, stoves, compressors.
When replacing an asset that is part of the building, the cost would normally be expensed. Examples: wiring, plumbing, hot water tanks.
If you cannot determine from the above whether the cost is a capital or current expense, consider the value of the expenses.
If they are of considerable value in relation to the value of the property, they are probably capital expenses.
However, if they are of considerable value because needed regular maintenance has not been done over a long period of time, the value would not necessary make these costs capital in nature.
If they are not of considerable value in relation to the value of the property, and are costs for ordinary maintenance, they are most likely current expenses.Unfortunately, sometimes it is difficult to determine if a cost should be capitalized or expensed, but the above guidelines will hopefully help you.