Capitalized interest refers to accrued interest on an asset or loan that is not immediately reported on the company’s income statement as an expense like other interests. Instead, the corporation’s balance sheet reflects the interest in the total value of the asset, and the income statement reflects the accrued interest later as a depreciation of the asset. This reporting method has multiple benefits for a corporation such as reduced taxes after depreciation. Capitalized interest can only be used for long-term assets, usually in the form of constructing real estate such as a headquarters.
The term capitalized interest frequently is used to mean capitalized accrued interest which refers to all of the interest a corporation owes presently on a loan and has no connection to capitalized interest for a long-term asset.
[Last updated in June of 2021 by the Wex Definitions Team]