The capitalization policy is the threshold that will be used to determine whether a larger purchase should be considered an asset of the business, or if it can be directly expensed. Generally, your tax preparer will make this determination. Traditionally we saw many tax preparers use low thresholds, such as $500. Meaning any purchase over that amount had to be considered an asset, and not just expensed. With the 2018 tax law changes, the IRS is supporting higher thresholds. So we now see some thresholds set as high at $2,500!
Why does this matter to you? Well, as a small business owner it is important for you to know whether these purchases are showing up on your Profit & Loss report as an expense, or if they are instead showing up on the Balance Sheet as a new asset. Let’s say for example your Profit & Loss is showing a $20,000 profit year to date. But you know that you purchased $30,000 in various equipment purchases so far this year. So are you really profitable? Where do these purchases show up? You can quickly see that this can, in fact, make a big difference in viewing your financials and understanding your business performance.
For tax purposes, this may or may not make a big difference and that’s why everyone should have a tax professional on their team to advise. The reality is that if you can expense it, that implies it is being considered a fully deductible business expense. But even if it is booked as an asset, because of the Section 179 deduction rules your tax person may still be getting you the full deduction in the year it was purchased.
At ZümiFi, we want to know the capitalization policy for each client upfront. Why? That ensures that we book things correctly, the first time.
ZümiFi – dedicated to getting your books right in real-time!