Capitalized Interest

Capitalized interest, like all interest, is the cost of borrowing something. Unlike all interest, capitalized interest is kind of like a hidden phantom on the balance sheet. Instead of borrowing money to get some new equipment (or other long-term assets), putting that cost on their income statement, they “capitalize” it. Capitalizing it means the interest is on the income statement through depreciation of the asset over time.

Which makes sense, right? If you’re buying a new, fancy piece of equipment for your business, you might be hesitant to treat it as just another line item, because it’s expensive, and because it’s contributing to your business for the long haul. You don’t want to look back later and be like, "Why are expenses so high that month? Oh yeah…" Instead, you can break up the cost over time, so it increases expenses just a tiny bit every month, rather than just the month you got it, which also reflects the asset’s contribution to the company over time.

This has been going on a long time, so there are official rules for it in U.S. tax law, and in GAAP (Generally Accepted Accounting Principles).