Under United States income tax law, to make a deduction in the current taxable year, a taxpayer must be able to show that a particular cost is a business expense[1] (but not an expense related to personal activities)[2] and not a capital expenditure.[3] Capital expenditures either create cost basis or add to a preexisting cost basis and cannot be deducted in the year the taxpayer pays or incurs the expenditure.[4]
In terms of its accounting treatment, an expense is recorded immediately and impacts directly the income statement of the company, reducing its net profit. In contrast, a capital expenditure is capitalized, recorded as an asset and depreciated over time.
Contents [hide]
1 Four ways costs can be capital expenditures
2 Illustrative Example
3 See also
4 References
5 External links
Four ways costs can be capital expenditures[edit]

The Internal Revenue Code, Treasury Regulations (including new regulations proposed in 2006), and case law set forth a series of guidelines that help to distinguish expenses from capital expenditures, although in reality distinguishing between these two types of costs can be extremely difficult. In general, four types of costs related to tangible property must be capitalized:[5]
1. Costs that produce a benefit that will last substantially beyond the end of the taxable year.[6]
2. New assets that have a useful life substantially beyond one year.[3] For example, in Commissioner v. Idaho Power Co.,[7] the taxpayer used its own equipment to construct and improve various facilities that it owned. The taxpayer sought to have the depreciation of the construction equipment treated as a deduction. The Court held that because the equipment was used to invest in a capital asset – the new and improved facilities – the costs had to be treated as capital expenditures.[8]
3. Improvements that prolong the life of the property,[9]