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danslearning
December 29, 2022
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Does purchasing fixed assets lower taxable income?

  • December 29, 2022
  • 2 replies
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I have searched quite a bit for this answer and cannot seem to find one at least the way Ive been searching for it. My questions is:

Does purchasing a fixed asset lower taxable income? If it does how does this get shown in quickbooks online when you categorize the transaction to the opening balance for the fixed asset?

 

 

Best answer by BigRedConsulting

Buying something that can be categorized as an asset is not an expense, and so won't impact your net income and also won't normally impact your taxable income.

2 replies

BigRedConsulting
BigRedConsultingAnswer
December 29, 2022

Buying something that can be categorized as an asset is not an expense, and so won't impact your net income and also won't normally impact your taxable income.

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danslearningAuthor
December 29, 2022

Thank you for that. So I have another question if you could. What is the purpose for tools and equipment expense account if technically tools and equipment are normally assets by the definitions Im reading.

BigRedConsulting
BigRedConsulting
December 30, 2022

Re: What is the purpose for tools and equipment expense account if technically tools and equipment are normally assets by the definitions Im reading.

 

As @Rainflurry pointed out, you can purchase what might be considered an asset, but then simply expense it instead if it is a small enough purchase (basically not worth tracking as an asset), or you can track it as an asset and still depreciate it fully in the first year, a second accounting step that will impact your taxes positively.

 

You might use an account like "tools and equipment expense account" for the first case, but probably not the second as for that you'd likely use first an asset and then a depreciation expense account.

 

You might also use a "tools and equipment expense account" for smaller purchases that have no special tax treatment, but are considered expenses by GAAP rules since they're immaterial. Think of a hammer or shovel or something else that costs something like $20, or even a cheap $89 computer printer.

 

Generally, (as I understand it) to track something as an asset it should 1) be expected to last/be useful for some time, perhaps multiple years, and 2) it has to be a material purchase / a purchase of significant cost, and 3) Be something that can be expected to retain its value for a significant period - meaning you might be able to sell it and recoup some of your money after using it for awhile.

 

So, if you purchased a $1000 table-saw, that's probably an asset (though also may be one you can expense away under section 179), but if you buy $1000 worth of printer paper, its not. If you purchase a $100 electric drill, its probably not an asset because it's immaterial. Similarly, if you run a hotel and you buy $1000 worth of towels that's probably an expense, because there is no market for used towels - and also, they may not last for even a year.

    Rainflurry
    Rainflurry
    December 29, 2022

    @danslearning 

     

    This is not a simple yes or no question, unfortunately.  From a tax accounting perspective, you have options depending on what the asset is and what you paid for it.  Tangible property <$2,500 can be expensed fully in the year of purchase without question - it's what's known as the De Minimis Safe Harbor Capitalization Threshold.  It just means that you do not have to capitalize (record as an asset) any tangible asset <$2,500.  It's the IRS's way of reducing the administrative burden on business. 

     

    You also have the option to take a Section 179 deduction (100% depreciation) in the year tangible personal property such as machinery or equipment is put into service.  Or, you can capitalize the purchase and depreciate it according to the IRS's depreciation schedule for the type of property it is.  There's no right answer, it depends on your circumstances.  The higher your income, the more valuable the depreciation expense is because it offsets income taxed at a higher rate.  If your income is low, and you see it increasing in the future, you may want to capitalize the cost and expense it in future years when your income will be higher.  Your CPA is the best resource for this.

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