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 3 and 7.
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
- The cost of property that qualifies for a deduction under
section 179. (See chapter 8.)
- The cost of qualifying clean-fuel vehicle property and
clean-fuel vehicle refueling property. (See chapter 12 in Publication 535.)
The costs of the following items, including the costs of material,
hired labor, and installation, are capital expenses.
- Business start-up costs. (See Going Into Business
in chapter 8.)
- Land and buildings.
- Additions, alterations, and improvements to buildings,
- Cars and trucks.
- Equipment and machinery.
- Breeding, dairy, and draft livestock.
- Repairs to machinery, equipment, cars, and trucks that
prolong their useful life, increase their value, or adapt them to
- 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.
Crop production expenses.
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 7.
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. These 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
- Costs incurred in replanting to replace lost
You can choose to capitalize certain indirect reforestation
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. However, you may recover a limited amount of your
costs for forestation or reforestation before cutting the timber
through amortization deductions. For more information, see
Depletion and Amortization in chapter 8.
||For more information about timber, see Agriculture
Handbook Number 708, Forest Owners' Guide to the Federal Income
Tax. Copies are $15 each and are available from the U.S. Government
Printing Office. Place your order using Stock #001-000- 04621-7.
The address, telephone number, and web site are:
Superintendent of Documents
U.S. Government Printing Office
P.O. Box 371954
Pittsburgh, PA 15250-7954
Christmas tree cultivation.
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 8.
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.