Is Paving a Parking Lot a Capital Expenditure?

On average, it costs between $2.50 and $7 per square foot to pave a parking lot in asphalt. This adds up quickly, with a single parking space taking 300 to 350 square feet. When making this kind of investment, it’s crucial to analyze the expense thoroughly to determine how to best allocate the funds for it regarding accounting and taxes. We’ll help you explore this common business practice in more detail.

Introduction to Capital Expenditures

Capital expenditures are funds a company uses to purchase, maintain, or upgrade its physical assets. These payments are recorded on the company’s balance sheet rather than expensed on an income statement.

You can only apply capital expenditure to assets with a useful lifespan of a year or more. Common capital expenditures include purchasing land, buildings, vehicles, heavy machinery, technology, and equipment. However, capital expenditure purchases can also come in the form of routine care for existing structures under the right conditions.

There are two primary forms of capital expenditure: maintenance and growth. Maintenance capital expenditure includes any monetary outflow contributing to the ongoing maintenance of the company’s operations. However, it’s important to remember that these expenses must apply to purchases that will last more than a year. For example, replacing an entire fence or piece of manufacturing equipment would count as a maintenance capital expenditure. Growth capital expenditures are purchases that will expand the existing operations, such as new store locations or manufacturing equipment.

Parking Lot Paving as a Capital Expenditure

Parking lots fall into a tricky gray area in terms of capital expenditure. The routine maintenance of a parking lot isn’t a capital expense; this cost is expensed. Routine maintenance is any job you can reasonably expect to perform periodically over the parking lot’s life. This includes sealing cracks and resealing the lot’s surface, which you’ll typically do annually.

Maintenance capital expenditures for a parking lot are infrequent repairs that you wouldn’t expect to invest in more than once every 10 years. Milling and resurfacing the lot  count as capital expenditures. Milling is the process of removing the top 1.5 to 2 inches of asphalt before resurfacing, which adds a new 1.5-inch layer of asphalt on top of the lot. This extends the life of the parking lot by about 15 years. Since this is a long-term investment, you can list it as a capital expense.

Replacing concrete also counts as a capital expense. New concrete will typically last 20 to 50 years. Therefore, investing in concrete installation or repair is something you won’t likely do more than once in a decade.

Accounting Treatment

As we mentioned, infrequent parking lot repair and replacement costs are capital expenses. Since you show a capital expenditure cost as an investment, the wear and tear on this purchase is documented as depreciation on the profit and loss statement.

To calculate the depreciation of your parking lot, you’ll need to use the IRS’s Modified Accelerated Cost Recovery System. This takes the initial cost of the parking lot, subtracts the salvage value of the lot, and divides the remainder by 15 years.

Though the land your parking lot sits on isn’t subject to amortization, the parking lot itself is. The lot increases the usefulness of the land, so it’s considered a land improvement. You can amortize costs associated with parking lot installation and maintenance across the periods that they benefit.

Since depreciation and amortization can apply to parking lots, you should have a skilled accountant determine how best to interpret this expense in your records. Your accountant may choose one method or aggregate amortization and depreciation for your financial reporting needs.

Tax Implications

Capital expenditures are covered in Part I, Section 263 of the tax code. Typically, you can’t fully deduct capital expenditures for the year in which they occur. Rather, they’re depreciated over their useful life span. If you count your parking lot repairs as operating expenses instead, you can deduct them for the year in which they occur.

You can depreciate capital expense costs on your taxes if you don’t perform these tasks more than once every 10 years. If you need to perform the task more than once in 10 years, you must list it as an operational expense for tax purposes. In general, you can depreciate the cost of your parking lot capital expenditure as long as you:

• Own the parking area.
• Use the parking area for business purposes.
• Will use the parking lot for more than a year.

Parking lots are considered depreciable properties for 15 years. No matter how long your asphalt or concrete lasts, you can no longer depreciate the lot on your taxes after 15 years.

Financial Planning Consideration

When planning for your parking lot expenses, it’s important to consider how you’ll classify those expenses in your accounting. You won’t be able to account for all your parking lot expenses as capital expenditures, so you should also make the most of the available annual deductions for operational expenses.

Since you can only account for parking lot paving as a capital expenditure once every 10 years, consult with your accounting team and tax preparer to determine the best time for this investment. Considering the full impact of capital expenditure will help you identify the best time for this investment instead of ordinary operational expenses.

Schedule Your Parking Lot Maintenance Wisely

Consult with your financial advisor to determine whether allocating your parking lot paving is most appropriate as common area maintenance or capital expenditure. If you’re charging tenants around the lot for parking area maintenance, it might make more sense to count it as a common area maintenance expense. However, if completing a more thorough paving project will add significant value at this time, you may want to navigate accounting for it as a capital expenditure. Give our experts at U.S. Pave the opportunity to help you determine what paving services your lot currently needs.

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