A capital improvement is a major expenditure that enhances a fixed asset to such an extent that the improvement can be recorded as a fixed asset. 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 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.
An example of a capital improvement is a new roof on an office building, since it extends the life of the building asset.