Capital Expenditures

Question 1

What is a capital expenditure?

Answer 1

An outlay for something that will last longer than a year.

Question 2

Are capital expenditures deductible?

Answer 2

Generally no. Instead, the cost either creates or adds to the taxpayer’s basis in an asset.

Question 3

What can a taxpayer do with a capital expenditure?

Answer 3

Either depreciate or amortize the basis over a period of time, OR, if neither of those is possible, wait until a disposition to recover the basis.

Question 4

When can you depreciate a capital expenditure?

Answer 4

If the asset is

1. tangible property that is
2. subject to wear and tear AND
3. held for either business or investment purposes.

Question 5

What does § 179 allow?

Answer 5

You can treat up to $1M of tangible personal property used in business as an expense (deduct it above-the-line) instead of a capital expenditure.

Question 6

What if you have more than $1M in capital expenditures?

Answer 6

You deduct the cost of the asset over a period shorter than the asset’s useful life, with bigger deductions early on and littler deductions later on.

Question 7

When can you amortize a capital expenditure?

Answer 7

When you have an intangible asset that is held for a business or investment purpose.

Question 8

What kinds of assets are subject to amortization?

Answer 8

• Goodwill
• Patents
• Copyrights
• Franchises
• Licenses
• Covenants not to compete

Question 9

How does amortization work?

Answer 9

You can deduct the outlay in equal amounts over a fifteen-year period. (AKA divide the outlay by 15 and deduct that much each year.)

Question 10

What if a capital expenditure cannot be depreciated or amortized?

Answer 10

Then you are stuck with the basis until some disposition of the property.