Deductions, expenses, and regulations get really confusing when it comes to taxes. IRS tax forms can leave you swimming in confusion, and worried that you’ll make a mistake and be paying for it later. One of the biggest concerns for small business owners (ones with assets below $10 million) is the comparison between capital expenditures and routine expenses. What classifies as what? What do the regulations themselves mean?
As a general rule, you will deduct your routine expenses and depreciate your capital expenses. Deducting routine expenses will only cover one year, while depreciating expenses will be over the course of up to 27.5 years.
Routine expenses are going to be those expenses that your business will make, well, routinely. These will be things that have to occur to keep the property in normal condition. Things like light bulbs, painting, carpet cleaning.
A good rule to follow for capital expenses is if it adds value to your property, it is most likely a capital expense. Examples could include alarm systems, roofs, flooring, elevators, plumbing systems, gas systems, and HVAC systems. Capital expenses (that must be depreciated, remember) are those that fall under three categories:
- “Betterment” – Improves the property for something that happened before you owned it, expands the physical property, or increases the property’s value or productivity. For example, when adding another wing or floor to the business itself.
- “Restorations” – Property is returned to its original state, replaces a large component of the property, or fixes damages to the property. This could be when the business’s entire electrical system must be replaced due to water leaks.
- Or “Adaptations” – When the property is changed from one purpose to another. For example, if a golf course business changed their property into a derby track.
However, there are exceptions to capital expenses. If the cost of any betterment, restoration, or adaptation is less than $2,500, look into the “Safe Harbor” rules – you could be able to deduct the expense from your taxes. However, if your business has an “applicable financial statement” the safe harbor amount goes up to $5,000.
Information above is referenced from:
Always consult a tax professional before changing any of your tax information. Do not take the information above as legal advice. Check the IRS website for more definitive regulations.