Business owners often face the question of how to handle major expenditures. Whether you are a Corporation LLC LLP or Sole Proprietorship properly recording these as expenses or fixed assets is important in order to report proper income as well as whether or not you will need to file a tangible return. So what are fixed assets?
Fixed Assets is a term used in accounting for assets and property which cannot easily be converted to cash. They can also be defined as an asset not directly sold to a firm’s consumer/end users. These are items of value which an organization has bought and will use over an extended period of time. They can often include land buildings vehicles computers office equipment furniture & fixtures software and machinery. The cost of a fixed asset is made up of purchase price tax shipping & installation costs plus any other pertinent costs that would apply to that asset.
Expenses as it relates to this subject would consist of smaller items purchased with a shorter economical life that is also used in the business. Items such as small tools utensils and basic operating supplies would be classified under this area and would be taken in the year of purchase.
When making purchases for your business you will need to answer a few questions about the purchase in order to determine whether to claim it as a fixed asset or an expense.
- Purchase price of the item.
- Economic life. How long will you use that item in the business? If it is more than 1 year then it is most likely a fixed asset.
- Will you or will you not sell the purchased item directly to your customers? (If you are buying to resale it is NOT a fixed asset.)
- If it is an improvement does it make the item it improves better or does it restore it to its original state? (Restoring to original state is not an asset but improving it could be.)
Once you have determined what you have purchased and how it should be coded there may be more steps involved. If you have determined it to be an expense make sure you code to a proper expense account. If you have determined it to be a fixed asset there are a few more steps that will need to be done.
- How many years must I depreciate this asset if it is even depreciable? (Land is an example of an asset you can’t depreciate.)
- What method of depreciation should/must I use? (Straight line MACRS etc.)
- Will or should this item have value at the end of its depreciable years? (This is a rare occasion but some items may have a depreciable base that is different from cost.)
- Current year tax codes/bonuses that could change the amount of depreciation I can take in the first year. (Bonus depreciation Sec 179 etc.)
When dealing with fixed assets there are so many different rules and regulations that it may be difficult to determine how to handle the asset. Misshandling the reporting of assets could result in the IRS auditing and changing your reporting in order to fall in line with the tax code. When dealing with fixed assets it is important to work with your trusted CPA in order to report what is best for your business and make sure you’re in line with the Internal Revenue Code. Need a Louisville CPA? Schedule a first consultation with Lindemeyer today.