Capital Expenses

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.

1. The cost of fertilizer, lime, etc. (see Fertilizer and Lime under Deductible Expenses, earlier).
2. Soil and water conservation expenses (see chapter 6).
3. The cost of property that qualifies for a deduction under section 179 (see chapter 8).
4. 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.

1. Business start-up costs. (See Going Into Business in chapter 8.)
2. Land and buildings.
3. Additions, alterations, and improvements to buildings, etc.
4. Cars and trucks.
5. Equipment and machinery.
6. Fences.
7. Breeding, dairy, and draft livestock.
8. Reforestation.
9. Repairs to machinery, equipment, cars, and trucks that prolong their useful life, increase their value, or adapt them to different use.
10. Water wells, including drilling and equipping costs.
11. Land preparation costs, such as:
    1. Clearing land for farming,
    2. Leveling and conditioning land,
    3. Purchasing and planting trees,
    4. Building irrigation canals and ditches,
    5. Laying irrigation pipes,
    6. Installing drain tile,
    7. Modifying channels or streams,
    8. Constructing earthen, masonry, or concrete tanks, reservoirs, or dams, and
    9. 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.

Timber. 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.

1. Site preparation costs, such as:
   1. Girdling,
   2. Applying herbicide,
   3. Baiting rodents, and
   4. Clearing and controlling brush.
2. The cost of seed or seedlings.
3. Labor and tool expenses.
4. Depreciation on equipment used in planting or seeding.
5. 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. 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 $14 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:

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.

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