| This article will explore business in a very general term. | | | | Some examples of capital expenditures would be the |
| For tax purposes of are engaged in a trade or | | | | costs of acquiring a building or an addition to an existing |
| business if your activity is entered into with the | | | | structure, installing a new roof, installing a new heating |
| expectation of making a profit, and if you devote a | | | | system. Commissions and legal fees incurred in buying |
| substantial amount of your time to the activity. Also if | | | | or constructing property are also capital expenditures. |
| you operate through an agent or an employee who | | | | The area in which the distinction between capital and |
| devotes a substantial amount of their time to your | | | | current expenses is of importance is where money is |
| activity, then you are considered to be in a trade or a | | | | expended on repairs, replacements, or improvements. |
| business. | | | | The latter two are capital expenditures that can be |
| It is possible for, an individual to be engaged in more | | | | recovered only through depreciation, (if they can be at |
| than one trade or business at the same time. I need to | | | | all) while the former is an expense that entitles the |
| point out here that if you merely hold securities or | | | | taxpayer to a full current deduction. |
| other property for investment purposes, although you | | | | A "repair" is defined as an expenditure made to |
| devote some time to the management, you are not | | | | maintain your business property in an ordinary, efficient |
| considered to be engaged in a trade or business | | | | operating condition, whereas an improvement |
| However in some cases, the ownership and | | | | materially adds to the value or utility of the property or |
| management of rental property can be considered a | | | | appreciably prolongs its useful life. |
| trade or business. | | | | Some examples of repairs are, repainting the insides |
| Normally when starting a business you will have what | | | | and outsides of buildings, repairing roofs, or fixing leaks. |
| is referred to as start up expenses. These are | | | | Expenditures for replacements of parts of a machine, |
| expenses incurred to decide whether to go into | | | | merely to maintain it in efficient operating condition, are |
| business, and which business to enter. You can | | | | deductible as repairs. However, if the machine is |
| expense up to $5,000; the balance must be amortized | | | | extensively overhauled, it is considered an |
| over a period of 180 months. If the start-up expenses | | | | improvement and should be capitalized. Other |
| exceed $50,000, the immediate deduction is reduced | | | | examples of capital items are new electric wiring, new |
| dollar for dollar, so that no immediate deduction can be | | | | roofs, new floors, new plumbing, and lighting |
| claimed if start-up costs exceed $55,000. | | | | improvements. |
| Please note that start-up costs incurred before | | | | The IRS rules are such that if you make both repairs |
| October 23, 2004 continue to be amortized over a | | | | and improvements at the same time, you should |
| period of 60 months if an amortization election was | | | | segregate the repair and improvement items; |
| made. | | | | otherwise, capitalization of the entire cost may be |
| When looking at expenses, it is necessary to | | | | required. |
| distinguish between capital expenditures and current | | | | I have touched on these few subjects when looking at |
| expenses because capital expenditures are not | | | | a business because my experience is that there is |
| deductible, but may be recovered through depreciation | | | | great confusion here. There is much more to consider |
| over a period of years. | | | | when starting or acquiring a business and you should |
| A capital expenditure represents an investment of | | | | consider the many resources available and educate |
| capital either to acquire property having a useful life of | | | | yourself about small business before you make any |
| more than one year or to increase the value of such | | | | major decisions... |
| property or to prolong its life. | | | | To your success! |