How is a capitalized amount treated for tax purposes?

A capitalized amount is treated for tax purposes as an expenditure that adds to the value of a property or extends its useful life. This is why it is included in the basis of the property. The basis of a property is essentially its cost basis for tax purposes, which is used to determine gain or loss when the property is sold. Capitalizing an expense means it must be added to the balance sheet as an asset instead of being deducted as an expense in the current tax year.

This approach aligns with the principle of matching expenses with the revenues they help generate, ensuring that the financial statements reflect the true financial position of the entity over time.

In contrast, deductible expenses are immediately recognized and deducted from income in the year they are incurred, and including capital expenditures as income or providing a refund does not fit the standard treatment of capitalized amounts.