Documenting Capital Expense(s)
Hello All!
First, thank you in advance for taking out the time to read this. My partner and I are currently renovating 2/4 units in our fourplex. My role is to keep track of the P&L, budgeting and documenting.
I have a question, a rookie one, about Capital Expense. I am somewhat confused and I want to ensure it is correct.
Is Capital Expense a one time charge? or is it an accumulation of charges? For instance, my partner and I spent 5k on new countertops and cabinets. I know this would fall under the Cap Ex category. However, we have also spent over $2650 in different plumbing related items over the past two months as well - faucets, maintenance, etc. How would I record this in my P&L. Currently, I am putting the one-time big purchases like the countertops and cabinets under Cap Ex. For plumbing, I am breaking it down for each unit under maintenance.
Is this correct? Incorrect? Is it a preference thing?
Thanks in advance! I truly appreciate you all.
@Account Closed
In some ways its sort of kinda a judgement call, i.e. its not exactly straightforward. Remodeling a kitchen would be a capital expense. But, perhaps just replacing a few cabinet doors because they are broken is a repair.
Furthermore, you say you are renovating a fourplex. I'm not as familiar with multi's, but if you just bought the place and haven't put them "in service" as rentals, any renovations are basically expenses that will go towards your cost basis of the property. After you put the unit into service, which is basically when you advertise it for rent, then the expenses are capital or repairs. The issue, of course, is the former are depreciated over their respective schedules.
But, sounds like you have two units with regular maintenance. Plumbing 'repairs' such as a leaky faucet or running toilets are repairs. You might replacing the whole faucet or toilet, but thats a repair. If you purposely remodeled the bathroom then I believe its technically a capital expense. You could look at IRS Publication on Depreciation for some guidance and examples. One way perhaps to help is lookup the various depreciation schedules.
I don't do formal P&L's... Its my own recordkeeping and however they are formatted probably would make no sense to me. But, as discussed, those one-time remodels or replacement of a "capital equipment" (boiler, furnace, hot water heater) are capital expenses because they have useful lives over 1 year. When they fail and you have to replace the whole unit its a capital expense and depreciated. If you making repairs to the unit, pretty much no matter how extensive, then its a repair that is deducted for that year.
I hope this helps, and no its not a preference thing. If you'd like, I'd be happy to chat about it...
Quote from @Account Closed:
Is Capital Expense a one time charge? or is it an accumulation of charges? For instance, my partner and I spent 5k on new countertops and cabinets. I know this would fall under the Cap Ex category. However, we have also spent over $2650 in different plumbing related items over the past two months as well - faucets, maintenance, etc. How would I record this in my P&L. Currently, I am putting the one-time big purchases like the countertops and cabinets under Cap Ex. For plumbing, I am breaking it down for each unit under maintenance.
Capital expenses are those purchases that scale your business. An easier way to think of it is: are you making a repair to a part of the item, or are you replacing the entire item. Examples include replacing the flooring, painting the interior or exterior, replacing windows, installing new kitchen cabinets, adding a deck or garage, etc. If you're only repairing what already exists, it would be considered a repair.
