(Recently submitted as requested to a site I write for and then they decided they couldn't use it. So I'm free to post it here.)
Not only does the federal tax code specify what business expenses are deductible on a tax return, it also specifies when you can take the deduction -- this tax year or over future years. Expenses that can be deducted this year are called current expenses. Those expenses that must be taken over future years are called capitalized expenses. Some generalizations help to determine whether or not an expense should be capitalized.
Ask yourself if the expense will be paid during the current business year, such as rent and utilities. If the answer is yes, it is considered a current expense and is deductible when filling out your business return for this tax year.
Ask yourself if the expense, while paid this year, will benefit your business for several years. Examples of this type of expense are the cost of land, vehicles and equipment --items that are considered business assets. You can include in a capitalized expense any costs incurred in buying the asset such as delivery costs and interest on a loan. Generally, if an item will be used more than one year, the expense is capitalized.
Capitalize the expense by spreading the cost, called depreciation, over several years. The number of years you must depreciate an expense is determined by the tax code. For instance, if you purchased a business, intangibles, such as the value of the already existing customer base as part of the purchase price, must be taken over 180 months.