What's in a Fixed Asset?
Fixed Assets Versus Other Expenses
As a business owner, you will make many purchases for use in your operations. There are two basic types of purchases; one is when items are used within a year’s time that will be expensed within that year. The other is for an asset that will last for more than one year called a fixed asset. Fixed assets are generally expensed over the years you expect to use them. If a fixed asset (like a piece of equipment) cost $5,000 and is expected to last five years, theoretically, $1,000 will be expensed in each of the five years. Should you expense or depreciate? These helpful tips for claiming small business tax deductions will help you solve this dilemma.
Depreciation Versus Amortization Versus Depletion
Fixed assets are depreciated while intangible assets are amortized. Intangible assets, such as goodwill, are still written off over their useful lives using amortization. When land is purchased with a building, the costs must be allocated to land and building. Land is not a depreciable asset. The exception is when land contains oil; the cost uses a process called depletion to expense the cost over the life of the process of extracting the oil.
Depreciation has many methods that may be utilized for your fixed assets. The double declining balance method features larger amounts being expensed in the early years. Straight line is the method described for the $5,000 asset and results in equal distribution of the cost over the five years. The Modified Accelerated Cost Recovery System (MACRS) is a tax method designed by the Internal Revenue Code resulting in more expense in the first years the asset is in service. The Units of Production method was designed for equipment based on how many units it is expected to produce over time and depreciation varies according to actual unit production.
Subsection 179 of the Internal Revenue Service (IRS) tax codes allows for special fixed asset deductions at an accelerated rate. The amount of the benefit is changed yearly. The fixed assets purchased may be partially or 100 percent deductible as an expense in the year of purchase if the assets meet certain criteria. Additionally, the total purchases for fixed assets cannot exceed a dollar threshold adjusted annually. You may be allowed to “expense" the entire cost of your fixed asset this year.