What to Look For:
Many businesses make capital expenditures on a regular basis to keep their business growing, but not enough businesses take advantage of recent changes in the tax law to expense these costs rather than capitalize and depreciate them. Profitable businesses making regular capital expenditures can realize significant benefits just by carefully reviewing invoices.
An expenditure for an asset that has a useful life of more than one year generally must be capitalized and depreciated. From a practical perspective though, capitalizing very small expenditures (like a broom) does not justify the recordkeeping costs. Most businesses have some kind of capitalization policy where small capital expenditures are expensed.
The tax law provides some leeway in expensing these small expenditures. Recent changes in the law allow a business to expense any individual item that costs less than $5,000 (or $2,500 for 2016 if there is not an audited financial statement), rather than capitalize and depreciate it. Your financial statement capitalization policy must reflect these thresholds in order for it to be effective for tax purposes, so be careful if you are tight on any loan covenants.
To maximize deductions, carefully review each invoice in order to identify individual items that are under the new per item threshold. Oftentimes, an invoice for a capital expenditure may be made of many smaller items that, if separately identified, could be under the capitalization threshold.
There are several benefits to reviewing capital expenditure invoices for breaking the costs up into smaller components. First is the immediate tax deduction for an item that is under the capitalization threshold. Second, the amount of recordkeeping can be minimized, where only large expenditures have to be tracked in the fixed asset system. Third, any business that cannot take advantage of the Section 179 deduction (i.e., immediate expensing of capital additions) can still take advantage of expensing small capital expenditures. And finally, for states in which there is a tax on personal property, these additions will not be recorded as fixed assets, and they will not add to the cost of property taxes.
There are many other meaningful ways to stretch your dollar in our new e-book: 12 (More) Great Ideas. Do you have a question about how this information applies to you? Email Jim Sacher, CPA or call him at 440-449-6800.