What Is a Capital Addition?

Malcolm Tatum

Capital additions are the expenses incurred when efforts are made to improve existing capital assets. This is different from the expenses that occur as part of the maintenance of those assets. A true capital addition may involve the purchase of new assets that will be used in tandem with previously owned assets, or the investment of additional funds to enhance the function and value of those existing assets. The key to discerning whether the effort is truly an addition or should be considered a maintenance expense is whether or not the cost results in enhancing or increasing the usability of the assets, as opposed to simply prolonging the life of those assets.

Man climbing a rope
Man climbing a rope

One way to understand what is meant by a capital addition is to consider a homeowner who chooses to make some changes to his or her property. The key is to decide if those changes have to do with maintaining uses of assets already in hand, or if the changes are intended to enhance the usage and value of that property. With this in mind, choosing to add on a patio along the back of the home where one did not exist before would be seen as something new that enhances the value of the property and adds purpose and function to the home. By contrast, replacing the flooring on an existing front porch would be considered an improvement, but would not add any additional function. Since there was already a porch floor in place, all the owner did was prolong the usable life of something that was already providing a function.

The concept of the capital addition is also common in business settings. When a manufacturing plant buys new parts for machinery that is already in common operation, this would not qualify as a capital addition, since the purchase is intended to allow those machines to continue functioning for a longer period of time. By contrast, buying two more of those same machines and putting them into production would tend to qualify as a capital addition, since they would increase productivity in ways that was not possible before. In like manner, a business that decides to open its own customer service center by leasing an adjoining suite of offices and buying the necessary work stations and equipment to create the center would be doing something to enhance the business operation, resulting in a capital addition.

Understanding what does and does not constitute a capital addition can be important when it comes to calculating taxes. Depending on the tax laws that prevail in the jurisdiction where a business is located, making the distinction could be the difference between a legitimate tax break and ending up paying higher taxes. For this reason, business owners should work with tax professionals to determine when and if a certain purchase qualifies as a capital addition, and when the purchase is considered to be maintenance.

Find out how you can save up to $257/month with these easy tools.

Discuss this Article

Post your comments
Forgot password?