When does a purchase become an asset, and when is it simply an expense? Enter the capitalization policy.
This policy sets a threshold to determine if a large purchase should be classified as a business asset or can be directly expensed. For years, many tax preparers operated with a threshold as low as $500. Meaning anything over this price became an ‘asset.’ But, thanks to the 2018 tax law changes, the IRS has been leaning into higher thresholds, with some going up to a whopping $2,500!
Why is this important for you?
Imagine looking at your Profit & Loss report, reflecting a profit of $20,000. But, you recall making equipment purchases amounting to $30,000 that year. Questions arise: Are you profitable? Where do these expenses feature?
Whether these purchases are treated as expenses or assets can vastly alter your understanding of business performance.
From a tax perspective, expensing an item is considered a fully deductible business expense. Conversely, even if a purchase is classified as an asset, it might still offer full deduction benefits in its purchase year, thanks to the Section 179 deduction rules.
How Does ZümiFi Fit Into This?
Before starting our financial magic, we prioritize understanding your business’s capitalization policy. This isn’t just protocol; it’s essential. It guarantees we’re on the same page from day one, ensuring accurate bookkeeping without constant revisions.
ZümiFi – Commitment to precision in every entry, every time!
Capitalization Policy Insights with ZümiFi