Whether you're running a small business or a large corporation, capital expenditure in income tax can be a complicated issue. Capital expenditures are large purchases made by a business for the long-term benefit of the business. This expense directly affects the cash flow and performance of the business.
To qualify as an eligible capital expenditure, the expenditure must meet specific conditions. Those conditions include that the expenditure must be incurred for the purpose of producing income from a business. It also must meet certain exclusions.
For example, a taxpayer who buys a trademark from another person is making a capital expenditure. It is also a tax-deductible expense, as long as the trademark has enduring value.
Capital expenditure is also a good way to track the investments your business makes. For example, if you own a restaurant, you may have to pay for kitchen equipment, renovations, or computers. However, you can depreciate these expenses over time. Similarly, you may be required to pay the legal costs of registering a trademark. If you purchase a building that was previously an office, you may have to pay for the fixtures, furniture, and renovations.
The capital expenditure formula is derived from the logic of the balance sheet. It is determined by the current period PP&E minus the prior period PP&E + current period depreciation.
A tax law affecting the tax treatment of capital expenditures has been revised. This is known as the Explanation of Changes.
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