What is a Capital Improvement?

A capital improvement is a major expenditure that enhances a fixed asset to such an extent that the improvement itself can be recorded as a fixed asset. A capital improvement expenditure tends to increase the market value of an asset.

How to Account for a Capital Improvement

To be a fixed asset, the improvement must be expected to last for at least one year. The enhancement must fall into one of the following categories:

It extends the life of the asset
It enhances the overall value of the asset
It adapts the fixed asset so that it can be used in a new way

If an expenditure meets these criteria, then it is recorded as a fixed asset, with a debit to the applicable fixed asset account and a credit to either the cash or accounts payable account. Once the improvement is completed, it is depreciated over its estimated useful life.

If an expenditure does not meet any of these criteria, then it is instead classified as a repair or maintenance expense, and so is charged to expense as incurred.

Examples of Capital Improvements

Here are several examples of capital improvements for a business:

Building expansion or new construction. Adding new square footage, such as expanding a warehouse, office space, or manufacturing facility, to accommodate growth and increase capacity.
Upgraded HVAC systems. Installing a new or upgraded heating, ventilation, and air conditioning (HVAC) system to improve energy efficiency and climate control in the building.
Renovated office space. Major renovations to office areas, including reconfiguring workspaces, installing new lighting, updating flooring, and upgrading furniture to improve employee productivity and comfort.
Technology infrastructure upgrades. Installing new servers, network infrastructure, or advanced technology systems like data centers to support modern IT needs and improve operational efficiency.
Energy-efficient lighting and insulation. Upgrading to LED lighting, adding better insulation, or installing energy-efficient windows and doors to reduce energy costs and improve sustainability.
Parking lot expansions. Expanding or repaving a parking lot, installing new lighting, or adding accessibility features for employees and customers, enhancing the overall functionality and appearance of the property.
Upgraded electrical systems. Modernizing electrical systems to meet increased power demands or improve safety, especially if the business has grown or added new equipment.
Accessibility improvements. Installing wheelchair ramps, elevators, automatic doors, or other ADA-compliant modifications to make the business more accessible and inclusive.
Warehouse automation. Implementing robotic systems, conveyor belts, or other automation technologies in a warehouse to increase efficiency and reduce labor costs.
Renewable energy systems. Installing solar panels, wind turbines, or other renewable energy systems to reduce long-term energy costs and increase sustainability.
Roof replacement. Replacing or upgrading the roof with more durable or energy-efficient materials to protect the building and reduce utility costs.
Landscaping. Adding outdoor seating, a garden, or green space to improve the aesthetics and value of the business property, especially in customer-facing businesses.

These improvements add value to the property, extend its useful life, or enhance operational efficiency and safety, making them worthwhile investments in business infrastructure.