Tax season is here and with it another round of talks on how best to categorize spending over the last year. One discussion in particular, on a PRSM X-Change discussion forum, focused on upgrades that prolong the life of a major piece of equipment and whether or not they can be categorized as “capital expenses.”
Many view replacing an HVAC coil as a capital expense, because of the extra, added value the upgrade provides to the unit (extension of the life of the asset). Replacing a coil can be costly (usually in the thousands of dollars, depending on the size of the unit), but can significantly extend the life of a unit, up to five, or even ten years, in some cases.
However, some disagree with this line of thinking, stating that coil replacement is more along the lines of routine maintenance, as you are replacing a component of a capital asset rather than an entire asset than can be depreciated. Although the coil would indeed extend the life of the asset, the coil is only one component. All of the components in the HVAC unit would be included in a capital definition in that scenario, which would typically not bear up to scrutiny, so goes the argument.
From the discussion on X-Change, it seems that one of the prime drivers in the capital vs. expense debate is a company’s policies, which, as seen from the discussion, are highly variable. Some companies have a higher threshold than others on what can be considered a capital expense and others believe their company should only count new assets as capital expenses.
If you did not get a chance to post on X-Change, please tell us below in the comments section what you think about this discussion. Do you believe replacements, such as HVAC coils, should be counted as a capital expense?