Interest Deduction

• Capital improvements are expensive and can be financed through a bank loan. The Internal Revenue Service allows businesses to fully deduct the interest costs associated with capital improvement loans. However, the costs must be deducted as they are paid. Additionally, the principal portion of a loan payment is not tax deductible.
  
  

Depreciation Deduction

• Depreciation is another cost that is fully deductible and lowers a company's tax liability. Over time, assets become less valuable or are used up in the course of business. Depreciation is a finance calculation used to account for a property's loss of value over time. Since capital improvements increase value or extend a structure's useful life, associated costs are added to the depreciation calculation.
  
  

Advantage on Capital Gains

• Capital gains occur when capital -- a building for example -- is sold for more than the costs incurred to obtain the asset. Capital gains are taxable as income. However, capital improvements can help mitigate tax liability. The costs associated with capital improvements are added to the cost basis of the home or structure, which helps lower the amount of capital gain recognized.
  
  

Energy Tax Credit

• Energy tax credits are frequently changing and expiring with new tax legislation. However, there have been programs that provide tax credits for some capital improvements. For example, between 2006 and 2008 the government offered a tax credit based on building square footage for new heating systems.