When Does an Expense Become an Asset?

Understanding one simple matter will allow faster completion of your tax return at a lower cost and with improved accuracy. This step is identifying asset costs separately from expenses. A common burden for accountants is adjusting expenses that belong in a fixed-asset category.

Accounting for Assets

Assets appear on the Balance Sheet of a business. The Income Statement, which lists only revenue and expenses, does not convey complete financial information. The Balance Sheet shows what happened to profit that remained after earning revenue and paying expenses. Changes on the Balance Sheet over time indicate if the profit was used to repay loan amounts or acquire new fixed assets such as equipment or office furniture.

You should identify expenses on your Income Statement that require classification as assets on the Balance Sheet. Get accounting help when you borrow money to acquire a fixed asset. Loan payments also are not expenses on the Income Statement. Classify them as reduction in loan balances on the Balance Sheet.

Asset Tax Details

An asset improperly classified as an expense overstates total expenses. This

The Internal Revenue Service guideline is that property with a useful life of more than one year is an asset.

lowers your taxable profit. The reduction is not justified, because the correct process is depreciation of the asset cost over several years. If the unallowable positive impact on your income tax is discovered, you incur assessment of back taxes plus penalty and interest. To avoid this, accurate classification of assets is critical.

When your accountant sees a change in fixed assets, further details are required about the purchases. Depreciation calculations are based upon when an asset is first placed in service. Put that date as a memo in the accounting entry that records payment of the asset cost.

Cost Threshold

Identification of assets purchases is not always easy. The Internal Revenue Service guideline is that property with a useful life of more than one year is an asset requiring depreciation. You cannot list such property as an expense in the year of purchase. However, small purchases normally don’t count. For example, a bookbinding machine is a fixed asset but a paper clip is not – even though the paper clip lasts more than one year.

Discuss with your accountant a policy for identifying items with minimal cost. The limit is generally based upon the size of your business. A purchase of property that lasts more than one year is still an expense when the cost is below the established amount.

Addition to Value

Improvements to property are assets rather than expenses. However, routine repairs are expenses. To distinguish the difference, consider the impact of the expenditure. A cost that makes something operate better for the present is an expense. For instance, fixing a hole in the wall is an expense. So is replacing a few shingles on the roof.

Conversely, adding a new wall or replacing the entire roof adds to the long-lasting value of the property. Therefore, these costs are assets. They add to the value of property, which is a key ingredient to identifying a fixed asset.

Outlays over an established threshold to add value or acquire property with a life of more than one year are properly classified as assets, not expenses.