Property, Plant and Equipment, (PP & E) and a subset of these known as Furnishings Fixtures and Equipment are items that provide value to a business over more than one year.
These items are capitalized, or set up on the balance sheet of a company in the Fixed Assets section. They are then depreciated over their useful life.
Types of Capital Equipment
- Land is treated as a capital item, but since it does not lose value from use, it is not depreciated. There is no depreciation expense associated with land.
- Land Improvements are capital and are depreciated over their useful lives. Parking lots are an example of a land improvement. They do deteriorate over time.
- Buildings are depreciated, and generally have a much longer life than other types. A shell of building can easily last for 40 years, and this is a common useful life. Current IRS regulations call for buildings to be depreciated over 39 years for tax purposes.
- Building Improvements are additions or renovations to the building. They may not last as long as the building, and therefore may be depreciated over a shorter timeframe. They are differentiated from equipment when they cannot be easily separated from the building.
- Equipment, or the specific category of movable equipment, is just that, items of a capital nature which have a life of over one year and can be easily relocated.
- Software that has a longer useful life can be treated as a capital item and depreciated. The definition of capital can be expanded to include other items that have value that extends over one year.
Leasehold Improvements
Additions or changes to space or property that is leased receives special treatment. A leasehold improvement is similar to a building improvement, but since the property is not owned, and will revert back to the owner, leasehold improvements are depreciated no longer than the life of the lease.
