As a business owner, you know that tax deductions for your expenses are important to your wallet! Well the IRS draws a fine line between what is a “capital improvement” and “repair and maintenance expenses,” so you should be very careful when you make a purchase. You can only deduct a capital expense when you sell the asset, which may be a long time from this tax season when you need the deduction. But a repair expense is deductible in the year you make it, so it is much more beneficial to you.
The IRS made deductions more difficult to define this year, so it may be an issue for you to deal with now.
But what is the definition of a capital expense vs. a repair ormaintenance? Ah, that is the question of the day! Capital expenses improve an asset by making its life longer or more valuable, while repairs and maintenance are necessary to keep it in shape but do not extend the life or value. Sounds simple, right? Well, the IRS gets into the nitty gritty detail when deciding what is a deductible expense. Materials and supplies, for example, that don’t “improve” the asset are usually considered as expenses by the IRS if they only last a year or less and don’t cost more than $200. Anything outside that definition becomes a gray area that begs more questions!
Thankfully, the IRS issued a “Safe Harbor” election for small business owners dealing with this conundrum! For businesses that don’t have audited financial statements prepared by a CPA, they can make an election to expense items costing less than $500. But, they must have “accounting procedures” in effect at the beginning of the tax year.
Don’t forget to make this election on your tax return and keep your company policies and procedures up to date! We can help you with small business tax preparation, tax consulting, and help track everything in Quickbooks so you don’t miss important tax deductions like these.
Schedule a consult today to find out more about what you can do.