When Not to Capitalize Interest
It is not always necessary to capitalize interest cost. The most optimum situation for doing so is when an asset requires substantial expenditures and a substantial period to construct, thereby accumulating a significant amount of interest cost. However, if there is a significant additional accounting and administrative cost associated with capitalizing interest cost, and the benefit of the additional information is minimal, you do not have to capitalize it. The accountant should not capitalize the associated interest cost for the following assets:
Assets that are either in use already or ready for their intended use.
See AlsoInvestment Property Tax Planning – What to do with your vacant land? - LB AdvisorsI bought 3 investment properties this year. Can I write off their mortgage interest on my main income taxes like my primary residence?or just rental property income?Is Interest Paid on Investment Property Tax Deductible?CapitalizationAssets that are not being prepared for use.
Assets that are not being used in an entity’s earnings activities.
Assets that are not included in the consolidated balance sheet of the parent entity.
Investments that the investor accounts for under the equity method, when the principal activities of the investee have already begun.
Investments in regulated investees that are capitalizing the cost of debt and equity capital.
Assets acquired with gifts or grants from donors, where the gift or grant is restricted to the acquisition of those assets.
Inventories that are routinely manufactured on a repetitive basis.
Capitalizing Interest Related to Land
You can only capitalize the interest cost associated with land if it is undergoing those activities necessary to prepare it for its intended use. If so, the expenditure to acquire the land qualifies for interest capitalization.
If an entity constructs a building on a newly-acquired land parcel, then the interest cost associated with the building should be capitalized as part of the building asset, rather than the land asset.
