When Is a Capital Expenditure Negative?

by Fraser Sherman; Updated September 26, 2017

Capital expenditures are moneys spent by business to buy or improve assets such as a car, an office computer or real estate. Capital expenditures are always negative -- a liability -- in the accounting books because they're a business expense the IRS won't let you deduct from your taxes. Instead, you have to recover the expense through time.

Function

Capital expenditures -- sometimes called capital outlays -- are used to purchase assets that will serve your business for longer than one year. The money can also be spent to improve an existing asset and extend its usable life, the Complete Tax website states. Expanding an office complex, upgrading factory equipment or installing wireless Internet in a rental property could all qualify. Money spent on repairs and maintenance is not a capital expenditure and can be written off as a business expense the year it's paid out.

Significance

Capital expenditures represent an investment in the business, the Premium Business Training website states; a company that doesn't buy new equipment or upgrade its old technology risks falling behind the competition. If a company isn't devoting much money to capital expenditure, that can be a sign growth has slowed or the market is tapped out, so it doesn't see any advantage to upgrading. On the other hand, a company that overspends on new equipment may not improve efficiency enough to compensate for the expenditure.

Identification

It's not always easy to tell the difference between improvements, which are capital expenditures, and repairs or maintenance, the IRS states. Generally, improvements add to the value of the asset, extend the lifespan or adapt it for a different use. If you spend money to keep your business equipment usable, for example, that's a deductible repair expense; if you overhaul it to the point you can keep it running five years longer than normal, that's a capital expenditure.

Effects

To recover a capital expenditure, you'll usually have to claim a loss for depreciation or amortization. Depreciation and amortization both allow you to claim some of the value of the asset as a deduction each year, based on the wear and tear from use. Eventually the asset will depreciate all its value and you'll no longer be able to claim anything -- but at that point, depreciation should have wiped out the original expenditure.

Considerations

When you start a business, the equipment you buy is a capital expenditure. Other expenses, such as advertising, travel or training are also treated as capital expenses and can't be deducted. Unlike money you spend on assets, these expenses cannot be depreciated; you recover the money if you sell the business. If you're unable to go into business after all, you can take some of your start-up costs as deductions, but not the money you spent on assets. To recoup that money, you have to sell the asset.

About the Author

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.

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