A capital expense is a payment, or a debt incurred, for the acquisition, improvement, or restoration of an asset that is expected to last more than one year. You include the expense in the basis of the asset. Uniform capitalization rules also require you to capitalize or include in inventory certain other expenses. See chapters 2 and 6.
Capital expenses are generally not deductible, but they may be depreciable. However, you can elect to deduct certain capital expenses, such as the following.
- The cost of fertilizer, lime, etc. (See Fertilizer and Lime under Deductible Expenses, earlier.)
- Soil and water conservation expenses. (See chapter 5.)
- The cost of property that qualifies for a deduction under section 179. (See chapter 7.)
- Business start-up costs. (See Business start-up costs, below.)
- Forestation and reforestation costs. (See Forestation and reforestation costs, later.)
Generally, the costs of the following items, including the costs of material, hired labor, and installation, are capital expenses.
- Land and buildings.
- Additions, alterations, and improvements to buildings, etc.
- Cars and trucks.
- Equipment and machinery.
- Draft, breeding, sport, and dairy livestock.
- Repairs to machinery, equipment, trucks, and cars that prolong their useful life, increase their value, or adapt them to different use.
- Water wells, including drilling and equipping costs.
- Land preparation costs, such as:
- Clearing land for farming,
- Leveling and conditioning land,
- Purchasing and planting trees,
- Building irrigation canals and ditches,
- Laying irrigation pipes,
- Installing drain tile,
- Modifying channels or streams,
- Constructing earthen, masonry, or concrete tanks, reservoirs, or dams, and
- Building roads.
You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized. See chapter 7.
You elect to deduct start-up or organizational costs by claiming the deduction on the income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Clearly indicate the election on your amended return and write "Filed pursuant to section 301.9100-2" at the top of the amended return. File the amended return at the same address you filed the original return. The election applies when figuring taxable income for the current tax year and all subsequent years.
You can choose to forgo the election by clearly electing to capitalize your start-up or organizational costs on a income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. For more information about start-up and organizational costs, see chapter 7.taxmap/pubs/p225-015.htm#en_us_publink100077417
The uniform capitalization rules generally require you to capitalize expenses incurred in producing plants. However, except for certain taxpayers required to use an accrual method of accounting, the capitalization rules do not apply to plants with a preproductive period of 2 years or less. For more information, see Uniform Capitalization Rules in chapter 6. taxmap/pubs/p225-015.htm#en_us_publink100077418
Capitalize the cost of acquiring timber. Do not include the cost of land in the cost of the timber. You must generally capitalize direct costs incurred in reforestation. However, you can elect to deduct some forestation and reforestation costs. See Forestation and reforestation costs,
next. Reforestation costs include the following.
- Site preparation costs, such as:
- Applying herbicide,
- Baiting rodents, and
- Clearing and controlling brush.
- The cost of seed or seedlings.
- Labor and tool expenses.
- Depreciation on equipment used in planting or seeding.
- Costs incurred in replanting to replace lost seedlings.
You can choose to capitalize certain indirect reforestation costs.
These capitalized amounts are your basis for the timber. Recover your basis when you sell the timber or take depletion allowances when you cut the timber. See Depletion in chapter 7.taxmap/pubs/p225-015.htm#en_us_publink100077419
You can elect to deduct up to $10,000 ($5,000 if married filing separately; $0 for a trust) of qualifying reforestation costs paid or incurred after October 22, 2004, for each qualified timber property. Any remaining costs can be amortized over an 84-month period. See chapter 7. If you make an election to deduct or amortize qualifying reforestation costs, you should create and maintain separate timber accounts for each qualified timber property. The accounts should include all reforestation treatments and the dates they were applied. Any qualified timber property that is subject to the deduction or amortization election cannot be included in any other timber account for which depletion is allowed. The timber account should be maintained until the timber is disposed of. For more information, see Notice 2006-47.
You elect to deduct forestation and reforestation costs by claiming the deduction on the income tax return filed by the due date (including extensions) for the tax year in which the expenses were paid or incurred. If you are filing Form T, Forest Activities Schedule, also complete Form T, Part IV. If you are not filing Form T, attach a statement to your return with the following information.
- The unique stand identification numbers.
- The total number of acres reforested during the tax year.
- The nature of the reforestation treatments.
- The total amounts of the qualified reforestation expenditures eligible to be amortized or deducted.
However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Clearly indicate the election on your amended return and write "Filed pursuant to section 301.9100-2" at the top of the amended return. File the amended return at the same address you filed the original return.
For more information about forestation and reforestation costs, see chapter 7.
For more information about timber, see Agriculture Handbook Number 718, Forest Landowners' Guide to the Federal Income Tax. You can view this publication on the Internet at www.fs.fed.us/publications
If you are in the business of planting and cultivating Christmas trees to sell when they are more than 6 years old, capitalize expenses incurred for planting and stump culture and add them to the basis of the standing trees. Recover these expenses as part of your adjusted basis when you sell the standing trees or as depletion allowances when you cut the trees. For more information, see Timber depletion under Depletion in chapter 7.
You can deduct as business expenses the costs incurred for shearing and basal pruning of these trees. Expenses incurred for silvicultural practices, such as weeding or cleaning, and noncommercial thinning are also deductible as business expenses.
Capitalize the cost of land improvements, such as road grading, ditching, and fire breaks, that have a useful life beyond the tax year. If the improvements do not have a determinable useful life, add their cost to the basis of the land. The cost is recovered when you sell or otherwise dispose of it. If the improvements have a determinable useful life, recover their cost through depreciation. Capitalize the cost of equipment and other depreciable assets, such as culverts and fences, to the extent you do not use them in planting Christmas trees. Recover these costs through depreciation.