Yes, construction in progress is a fixed asset under GAAP. It sits in the non-current section of the balance sheet inside Property, Plant, and Equipment, right next to buildings, machinery, and land. What sets it apart from the other assets in that category is that it’s on hold: accumulating costs, not yet depreciating, waiting for the project to finish and start earning its keep.
Where CIP Belongs on the Balance Sheet
CIP is grouped with other long-term property because the business expects to use the finished asset for years, not months. A company building a warehouse, assembling custom equipment, or expanding a facility reports all accumulated project costs under this heading until the work is done. It doesn’t belong among current assets like cash or inventory.
Within PP&E, CIP is typically shown as its own line item or broken out in the footnotes. That separation matters to investors and lenders because CIP represents capital that’s been committed but isn’t yet productive. A balance sheet showing $4 million in CIP tells a very different story than one showing $4 million in operating equipment. The first is a bet on the future. The second is already at work.
What Makes CIP Different From Other Fixed Assets
Two things distinguish CIP from a finished building or a working piece of equipment on the same balance sheet.
First, it does not depreciate. Depreciation spreads an asset’s cost over the years it contributes to operations, and an unfinished warehouse or a half-assembled production line isn’t contributing to anything yet. The CIP balance just grows as costs are added; it never shrinks from depreciation charges during the build phase. A $10 million project that takes three years to complete will sit on the balance sheet at its accumulated cost for all three years without producing a dollar of depreciation expense.
Second, interest on money borrowed to fund the build gets capitalized into the asset’s cost rather than expensed. Under FASB’s guidance on interest capitalization, borrowing costs incurred to build an asset are treated as part of what the asset actually cost, alongside materials and labor. If a specific loan funds the project, the rate on that loan applies to the project expenditures. When general borrowings fund the work, a weighted-average rate across outstanding debt is used instead.1Financial Accounting Standards Board (FASB). Summary of Statement No. 34 – Capitalization of Interest Cost
Interest capitalization stops once the asset is substantially complete and ready for its intended use. There’s a materiality out: if capitalizing versus expensing wouldn’t meaningfully change the financial statements, the company can skip the exercise. Interest can never be capitalized on inventory produced in large quantities on a repetitive basis. The rule is meant for discrete, time-intensive projects.1Financial Accounting Standards Board (FASB). Summary of Statement No. 34 – Capitalization of Interest Cost
What Costs Go Into the CIP Account
Every cost directly tied to getting the asset built and ready for use gets capitalized:
- Direct materials such as steel, concrete, lumber, and wiring that become part of the finished asset.
- Direct labor, including wages and benefits for workers and contractors doing the construction.
- Site preparation, including grading, demolition, and utility connections.
- Professional fees paid to architects, engineers, and construction managers.
- Permits and inspection fees required to authorize and approve the work.
Project-specific overhead is also capitalized. A temporary power line to the job site, a portable office for the site supervisor, insurance covering the project during the build — these go into CIP because they wouldn’t exist without the project. The test is whether the cost is directly attributable to bringing the asset to its intended condition and location.
Costs That Stay Out
Plenty of spending during a construction project does not belong in the asset’s cost. General administrative overhead that would have been incurred regardless of the project (corporate accounting staff, CEO salaries, home office electricity) gets expensed as incurred. So does marketing and selling expense.
Training is a common trap. Once construction wraps up and staff need to learn how to operate the new equipment or work in the new facility, those training expenses go to the income statement, not the balance sheet. The rationale is that training benefits people, not the physical asset. Costs incurred after the asset is substantially complete, like landscaping around a finished building or cosmetic upgrades made once operations have begun, also don’t belong in CIP.
Getting the line wrong in either direction creates problems. Over-capitalizing inflates the asset’s value on the balance sheet and understates current expenses, making profits look better than they are. Under-capitalizing does the reverse, dragging down reported earnings during construction while understating the true investment in the asset.
When CIP Becomes a Depreciating Asset
The dividing line is the placed-in-service date. Under Treasury regulations, property is placed in service in whichever tax year comes first: the year the taxpayer’s depreciation practice would start the depreciation clock, or the year the property reaches a condition of readiness and availability for its assigned function.2eCFR. 26 CFR 1.46-3 – Qualified Investment
That readiness-and-availability test is where disputes happen. The asset doesn’t need to be generating revenue. It doesn’t even need to be in active use. If a building has its certificate of occupancy and could be occupied, it’s placed in service even if the company hasn’t moved anyone in yet. Installed and tested equipment counts as placed in service even if production hasn’t started.
For more complex projects like power plants or specialized industrial facilities, the IRS looks at whether required permits have been obtained, whether control has passed to the owner, whether critical testing is complete, and whether regular operations have commenced. No single factor is decisive; it’s a totality-of-the-circumstances analysis.2eCFR. 26 CFR 1.46-3 – Qualified Investment
Reclassifying to a Permanent PP&E Account
Once the project hits its placed-in-service date, accountants reclassify the accumulated costs. Everything in CIP moves to the appropriate permanent PP&E account: Buildings, Machinery, Leasehold Improvements, or whatever category fits. This isn’t a formality. The reclassification entry is the accounting event that starts the depreciation clock.
At transfer, the company sets the asset’s useful life, salvage value, and depreciation method. A commercial building might be depreciated over 39 years using straight-line for tax purposes; a piece of manufacturing equipment might get seven years. Those choices lock in the annual depreciation expense for the rest of the asset’s life.
Timing matters. Delay the transfer and you understate depreciation, overstate net income, and miss tax deductions. Jump the gun and you’re depreciating an asset that isn’t actually ready, which creates exposure in an audit.
When Part of a Project Finishes First
Large projects don’t always finish all at once. A company building a multi-wing office complex might complete and occupy the east wing while the west wing is still months away. GAAP allows, and good practice demands, transferring the completed portion out of CIP and beginning to depreciate it separately.
Minor punch-list items and billing disputes shouldn’t hold up the transfer unless they’re significant enough to make the asset essentially unusable. If half the building is occupied and operational, the costs attributable to that half should be moved to a depreciable account. Without partial transfers, a five-year campus expansion would show zero depreciation on buildings that have been generating revenue for years.
When CIP Gets Written Down Instead
CIP doesn’t depreciate, but it isn’t immune to write-downs. Under GAAP’s impairment framework, long-lived assets must be evaluated whenever events or circumstances suggest the carrying amount might not be recoverable. Several red flags are specific to construction projects:3Financial Accounting Standards Board (FASB). Summary of Statement No. 144 – Accounting for the Impairment or Disposal of Long-Lived Assets
- Accumulated costs significantly exceeding the original budget.
- A sharp decline in the market price of similar completed assets, or insufficient demand for a rental project still under construction.
- Regulatory action, loss of a key customer, or an economic downturn that undercuts the project’s expected value.
- A current expectation that the asset will be sold or disposed of well before the end of its originally estimated useful life.
When an indicator is present, the company tests recoverability by comparing the asset’s carrying amount to the undiscounted future cash flows it’s expected to generate. If the carrying amount exceeds those cash flows, the asset is impaired and gets written down to fair value. The write-down hits the income statement as a loss in the period recognized.
If a project is abandoned outright, the entire CIP balance is written off. Companies sometimes delay acknowledging abandonment to avoid the income statement hit, but GAAP requires the write-down once the decision is made.
Tax Rules That Sit Alongside GAAP
GAAP capitalization rules and tax capitalization rules overlap but aren’t identical. For tax purposes, Section 263A of the Internal Revenue Code, known as the Uniform Capitalization rules or UNICAP, requires businesses to capitalize direct costs and a share of indirect costs when they produce real or tangible personal property. Self-constructed assets like buildings and equipment are covered.4GovInfo. 26 USC 263A – Uniform Capitalization Rules
UNICAP’s indirect costs go broader than many businesses expect. Beyond direct materials and labor, it pulls in payroll taxes, insurance on the project, general and administrative costs allocable to production, and interest incurred during the build. Marketing and distribution costs are generally excluded.
Small businesses get a break. Taxpayers that meet the gross receipts test under Section 448(c) are exempt from UNICAP entirely. For 2026, that threshold is $32 million in average annual gross receipts over the prior three tax years. Below that line, a business can follow its regular accounting method for capitalizing construction costs without layering on UNICAP’s additional indirect cost allocations.4GovInfo. 26 USC 263A – Uniform Capitalization Rules
The De Minimis Safe Harbor for Small Purchases
Not every long-lived asset needs to run through the CIP process. The IRS provides a de minimis safe harbor that lets businesses expense small purchases immediately. The thresholds depend on whether the business has an applicable financial statement (an audited statement, an SEC filing, or similar): up to $5,000 per invoice or per item with an applicable financial statement, up to $2,500 without one.
To use the safe harbor, the business must attach an election titled “Section 1.263(a)-1(f) de minimis safe harbor election” to its timely filed federal return for the year. The election applies to all qualifying expenditures for that year; you can’t cherry-pick which items to expense and which to capitalize under this provision.5IRS. Tangible Property Final Regulations
For GAAP purposes, companies set their own capitalization thresholds as a matter of policy. Many businesses use a round number, $5,000 or $10,000 is common, below which purchases hit the income statement immediately. The IRS safe harbor and the company’s GAAP policy are separate decisions that don’t have to match, but aligning them reduces book-to-tax differences and simplifies recordkeeping.