This is one of the most difficult concepts for business owners to grasp. In general terms, most business purchases are tax deductible. It's the decision as to whether that purchase is an expense or an asset that will determine how you account for it. That decision rests on whether you want to write off the purchase in the same financial year it was made, or amortize (depreciate) it over a number of years.

That decision rests on whether you want to write off the purchase in the same financial year it was made, or amortize (depreciate) it over a number of years.

If you decide on the first, then it's an expense. If you decide on the second, then it a capitalized asset.

Sounds simple doesn't it? Let's look at it in a bit more detail.

Members in the GST council agreed upon the new tax, which gives restaurants that have a yearly income below Rs50 lakh would be eligible to pay just the new 5% tax. The tax is split evenly between the central GST and the state GST. Small restaurant proprietors highly approve of this because it helps them stay economically viable against much bigger competitors. It saves money for the business in terms of upkeep, as well as the money in customer's pockets.

Can the IRS help you decide?

No. The IRS doesn't give any hard and fast rules or thresholds for whether a purchase is to be expensed or capitalised. But typically, an item is considered to be capitalized if (a) it's a new or replacement item, (b) it has a useful life of at least one year and (c) it's used in the business or in an income-producing activity.

Most accountants set minimum purchase thresholds for an item to be considered an asset. They do this to stop businesses adding items to the balance sheet that really should be counted as an expense.

Does this mean that the $250 coffee machine you bought for your restaurant should be capitalized? Not necessarily. Keep the following in mind:

• The de minimis rule: This allows you to expense a purchase (or several purchases made at the same time) so long as doing so doesn't significantly distort your bottom line, thereby showing an extraordinary low income. A general rule of thumb is that they should be less than 0.1% of your gross receipts for the year, and/or 2% of your total depreciation and amortization expense for the year.
• The economic useful life: If the item is used for only 1 year and has no value after that time then it may be expensed. But again, so long at it meets the de minimis rule.

Capitalization and expensing have different effects on the balance sheet and income statement. To avoid any confusion, you should write a fixed asset capitalization policy for your business and agree it with your Accountant. It will aid in your decision-making as well as being helpful as a defence should you ever get audited.

Orlando Accountant Fajardo And Associates can help