I. INTRODUCTION TO CAPITALIZATION AND COST RECOVERY.
1. Capital Expenditures [§263]
§263 specifically disallows deduction of a capital expenditure.
- acquiring fixed, and in some cases, intangible assets
- repairing an existing asset so as to improve its useful life
- upgrading an existing asset if its results in a superior fixture
- preparing an asset to be used in business
- restoring property or adapting it to a new or different use
- starting or acquiring a new business
An ongoing question for the accounting of any company is whether certain expenses should be capitalized or expensed. Costs which are expensed in a particular month simply appear on the financial statement as a cost incurred that month. Costs that are capitalized, however, are amortized over multiple years. Capitalized expenditures show up on the balance sheet. Most ordinary business expenses are clearly either expensable or capitalizable, but some expenses could be treated either way, according to the preference of the company. Capitalized interest if applicable is also spread out over the life of the asset.
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