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Q: IRS/Accounting: Asset vs Expense ( Answered 5 out of 5 stars,   0 Comments )
Subject: IRS/Accounting: Asset vs Expense
Category: Business and Money > Accounting
Asked by: triptych-ga
List Price: $10.00
Posted: 30 Jul 2004 19:27 PDT
Expires: 29 Aug 2004 19:27 PDT
Question ID: 381561
I want a definitive answer as to what the IRS and "proper" accounting
principles say as to when to expense vs. depreciate an asset. I have
heard that the definition of an asset is something with a life of over
5 years and a "significant" cost... What exactly is the number that is
considered significant?  My accountant seems to be telling me that
$500 is a good threshold number.. But I get the feeling she just made
that up. There is no official word on this from the IRS?

Can you give me expense-vs-asset answers for the following:

A> $350 Digital camera
B> $200 Windows XP Software upgrade
C> $600 Quickbooks Software
D> $150 for a used pallet jack -- even though this would be $800 new
E> 5 $100 memory upgrades for PC's, purchased on the same invoice
Subject: Re: IRS/Accounting: Asset vs Expense
Answered By: taxmama-ga on 04 Aug 2004 08:43 PDT
Rated:5 out of 5 stars
Dear Triptych,

Your accountant is correct. IRS has not defined the threshold
amount at which you MUST capitalize an asset. From their 
perspective, it depends on the size of the business. 

Businesses with low incomes and little or no profit, 
should capitalize purchases at a lower level than large,
profitable businesses. 

However, if you look at the books of publicly traded 
corporations, with millions of dollars in assets, you
will find that even they will still start capitalizing
assets at $500 or $1,000. 

I've only been preparing tax returns, and representing 
clients at IRS audits for about a quarter century. So, I
know that I still have a lot to learn. But, to date, IRS
auditors have always accepted $500 as an acceptable 
capitalization level - even for my smallest businesses. 

So, trust your accountant's judgment - it's sound. 

You can read IRS Publication 946 - Depreciation

Reading "What Property Can Be Depreciated"
You won't find a specific amount mentioned - just a
description of property types.
To respond about your specific items:

A> $350 Digital camera

This is 'Listed Property". 
If you have 50% or more of personal use, you can't 
take a deduction at all. You must keep a log of
personal and business use of all listed property.

If you use it 100% for business - either expense 
the whole amount as a supply, or use Sec 179 depreciation, 
just in case you're afraid IRS would insist that it should
be capitalized.

After all, you have $100,000 of IRS Code Section 179 depreciation
available to you since 2003. Take advantage of it any time you
have doubts.  

B> $200 Windows XP Software upgrade  AND   C> $600 Quickbooks Software

A change in the tax laws, starting 2003:
Inclusion of off-the-shelf computer software as 
eligible section 179 property. Off-the-shelf 
computer software placed in service in 2003 
qualifies for the section 179 deduction.

See Off-the-shelf computer software in the
discussion on eligible property under 
What Property Qualifies? in chapter 2.

D> $150 for a used pallet jack -- even though this would be $800 new

It doesn't matter how much it would have cost new. 
You bought it for $100. Treat it as a supply. 

E> 5 $100 memory upgrades for PC's, purchased on the same invoice

Each item was less than $500. They belong in supplies, 
or office supplies. Again, if you have doubts - use Sec 179.
I've never had a problem with expensing anything like that. 

Incidentally, your accountant didn't make it up. She went 
to many hours of continuing education - and that has been
the rule of thumb in the tax and accounting industry for
over 20 years. 

Sometimes, there are unwritten rules that are standard practice. 

I hope this makes you feel more comfortable. 

Your TaxMama-ga
triptych-ga rated this answer:5 out of 5 stars and gave an additional tip of: $15.00
WOW! Excellent response, I probably should have put a higher price on
this one, thanks for going beyond the call

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