Define: Capital Item

A capital item refers to a long-term asset that is used in a business or organisation to generate income. It can include property, equipment, vehicles, machinery, or any other tangible asset that has a useful life of more than one year.

While expenses are costs incurred in the day-to-day operations of a business and are deducted from revenue in the same accounting period, capital items are long-term investments that are depreciated over time and have a lasting impact on the business’s operations.

The cost of a capital item includes the purchase price, any additional expenses incurred to bring the item into use (such as installation or transportation costs), and any necessary modifications or improvements to make it operational.

No, the cost of a capital item cannot be fully deducted in the year of purchase. Instead, it is typically depreciated over its useful life, allowing for a portion of the cost to be deducted each year.

Depreciation is the process of allocating the cost of a capital item over its useful life. It recognizes that the item’s value decreases over time due to wear and tear, obsolescence, or other factors.

Depreciation can be calculated using various methods, such as straight-line depreciation, declining balance depreciation, or units-of-production depreciation. The chosen method depends on the nature of the asset and the accounting policies of the business.

Yes, you can sell a capital item before it is fully depreciated. However, the sale may have tax implications, and you may need to account for any gain or loss on the sale.

The cost of repairs or maintenance on a capital item is generally not deductible as an expense. Instead, these costs are added to the item’s basis and may be depreciated over its remaining useful life.

If a capital item is stolen or destroyed, you may be able to claim a deduction for the loss. However, the amount of the deduction will depend on factors such as insurance reimbursements and the adjusted basis of the item. It is advisable to consult with a tax professional for guidance in such situations.