Capitalization vs. Deduction: Accounting and Tax Rules for Businesses in Costa Rica.

By Ana Yency Campos

When a company makes an investment, a key question arises: should it be recorded as an expense or capitalized as an asset? The answer depends on International Financial Reporting Standards (IFRS) and Costa Rican tax regulations, which may have different criteria.

While IFRS aims to reflect a company’s economic reality, tax regulations establish specific rules to determine which expenses can be deducted immediately and which must be amortized over time. Therefore, conducting a tax reconciliation at year-end is essential to ensure compliance without affecting financial reporting.

IFRS Criteria for Expense Capitalization

Under IFRS, an expense must be incorporated into an asset’s cost if:

• It generates future economic benefits by extending the asset’s useful life or enhancing its performance.

• It is directly related to the asset’s acquisition or construction, including costs such as transportation, installation, and testing.

• It is not routine maintenance or repair; if the cost only maintains the asset’s operation, it should be recorded as an expense.

Practical Example: A company purchases industrial machinery for $ 20.000 . Later, it installs an automation system to enhance efficiency—this cost should be capitalized. However, if the company only performs routine maintenance (such as an oil change or calibration), the expense is recorded in the income statement.

Tax Deductibility Under Costa Rican Regulations

The Income Tax Law (Law No. 7092) establishes specific rules that may differ from IFRS.

Deduction Limit: 25% of Base Salary

If the unit cost of an asset does not exceed 25% of a base salary, it can be deducted immediately. If it exceeds this amount, it must be capitalized and amortized unless specifically authorized by the Tax Authority.

Tax Treatment of Other Costs

• Interest and financial expenses → If capitalized in accounting, they are not immediately deductible and must be recovered through depreciation.

• Maintenance and repair costs → Deductible as long as they do not constitute a substantial improvement.

• Asset improvements → If they increase the asset’s useful life or capacity, they must be capitalized. If they only maintain its operation, they can be deducted immediately.

  
  

The Importance of Tax Reconciliation

Due to the differences between IFRS and Costa Rican tax laws, tax reconciliation is important.

While accounting must comply with IFRS, tax adjustments ensure the correct determination of the taxable base for income tax purposes.

A proper tax reconciliation helps optimize the tax burden, mitigate audit risks, and improve financial planning.