Where Does Construction in Progress Go on the Balance Sheet?

Construction in Progress on the balance sheet appears inside Property, Plant, and Equipment as its own non-current asset line, held at accumulated cost and carrying no depreciation until the finished asset is placed in service. It is the one PP&E item that sits at gross cost with no offsetting accumulated depreciation, which is why it almost always gets its own line rather than being folded into buildings or machinery.

Where the Line Sits Within PP&E

CIP carries a natural debit balance and belongs in the PP&E section, separate from land, buildings, and equipment. Under generally accepted accounting principles, fixed assets share three traits: they are held for use in operations rather than for sale, they are long-term, and they have physical substance.¹ A half-finished warehouse or a partially assembled piece of specialty equipment meets all three, even though it cannot yet generate revenue.

For public companies, Regulation S-X requires the balance sheet to state the basis used to determine PP&E amounts and to show accumulated depreciation separately.² Presenting CIP on its own line keeps that presentation clean, because there is no accumulated depreciation to net against it.

Why the Balance Is Not Depreciated

Depreciation allocates an asset’s cost over the period it produces economic benefit. A project still being built produces nothing yet, so expensing part of its cost would violate the matching principle. The IRS defines “placed in service” as the point when property is ready and available for a specific use, even if actual use has not begun.³ Until a constructed asset reaches that point, it stays in CIP and no depreciation is recorded.

What Costs Accumulate in the Account

Every dollar spent getting the asset ready for its intended use belongs in CIP. The main categories include:

Direct materials such as steel, lumber, concrete, wiring, and hardware bought for the project.
Direct labor, meaning wages and benefits paid to employees or contractors doing the physical construction or installation.
Allocated overhead tied to the project site, including utilities at the construction location, project insurance, and supervisory salaries attributable to the build.
Permits and professional fees, including architectural, engineering, and inspection costs.

Capitalized Interest

Borrowing costs incurred while a qualifying asset is being prepared for use are added to CIP rather than expensed immediately. Under ASC 835-20, a qualifying asset is one that requires a substantial period of time to get ready for its intended use, and a building under construction is the classic example. The amount capitalized is the “avoidable interest,” meaning the interest that would not have been incurred had the construction expenditures not been made. Once the asset is substantially complete, interest capitalization stops and any further borrowing cost hits the income statement as a regular expense.

Tax Capitalization Under Section 263A

For federal income tax purposes, Section 263A, commonly called the Uniform Capitalization or UNICAP rules, requires taxpayers to capitalize both direct costs and an allocable share of indirect costs for real or tangible personal property they produce. The statute defines “produce” broadly to include constructing, building, installing, manufacturing, developing, or improving property.⁴

The list of indirect costs that must be capitalized under UNICAP reaches further than many companies expect. It includes pension contributions, employee benefit expenses, insurance on the facility or equipment, rent, property taxes, utilities, repairs and maintenance, and even quality control costs, to the extent those costs are attributable to the production activity.⁵ The CIP balance for tax purposes can be meaningfully larger than a book estimate that looks only at materials, labor, and site overhead.

What Happens When the Asset Is Placed in Service

Once construction is substantially complete and the asset is ready and available for its intended function, the entire accumulated CIP balance transfers out of CIP and into the appropriate fixed asset category, whether that is Buildings, Machinery, Land Improvements, or another PP&E account. CIP for that project drops to zero and the receiving account increases by the same amount.¹

Depreciation begins at that point. For book purposes, the company selects a useful life and depreciation method, such as straight-line or declining balance, and allocates the cost over the asset’s expected service period. For tax purposes, the placed-in-service date determines which year’s depreciation conventions apply and triggers the first-year depreciation deduction, reported on Form 4562.⁶

Getting that date right matters. Recording it too early overstates depreciation expense and understates net income for the period. Recording it too late delays deductions and leaves a productive asset sitting in a non-depreciable account. Auditors typically test the date against occupancy records, substantial completion certificates, or the date the asset first performed its intended function.

Impairment or Abandonment Before Completion

Not every project reaches the finish line, and the balance sheet has to reflect that. Under ASC 360-10-35, a company must test a long-lived asset for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable.¹ For a CIP balance, common triggers include:

Cost overruns, where accumulated costs significantly exceed the original budget.
Market changes, such as a sharp drop in expected demand or price for the asset being built.
Regulatory setbacks that affect the project’s viability.
Strategic shifts, including a management decision that the project will likely be sold or abandoned early.

The test compares the asset’s carrying amount to the total undiscounted future cash flows it is expected to generate. If those cash flows fall short, the loss is measured as the difference between the carrying amount and fair value. When a project is fully abandoned with no alternative use, fair value goes to zero and the entire CIP balance is written off as an impairment loss on the income statement.

Disclosures That Accompany a Material CIP Balance

Companies carrying significant CIP are expected to give context in the notes. For public filers, the SEC requires discussion of material commitments for capital expenditures in Management’s Discussion and Analysis, including the general purpose of those commitments and how they will be funded. The disclosure threshold is materiality: a commitment must be disclosed if its effect on the company’s financial condition is “reasonably likely,” a standard the SEC has described as lower than “more likely than not” but higher than “remote.”⁷

GAAP also calls for footnote disclosure of contractual obligations to spend future amounts on construction that are not yet recorded as liabilities. These disclosures let investors and creditors see how much cash still has to flow out to finish the projects sitting in CIP. A company with $20 million in CIP and another $50 million in contractual commitments to complete those projects presents a very different liquidity picture than one whose projects are nearly paid for. If a CIP asset was impaired during the period, the company must also disclose the amount of the loss, the circumstances that led to it, and how fair value was determined.

1
Board of Governors of the Federal Reserve System. Financial Accounting Manual for Federal Reserve Banks – Chapter 3 Property and Equipment
2
GovInfo. Securities and Exchange Commission Regulation S-X 210.5-02
3
Internal Revenue Service. Publication 946 – How To Depreciate Property
4
Office of the Law Revision Counsel. 26 U.S. Code 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses
5
eCFR. 26 CFR 1.263A-1 – Uniform Capitalization of Costs
6
Internal Revenue Service. Instructions for Form 4562 (2025)
7
SEC.gov. Financial Reporting Manual – Topic 9