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.

How to Get Help With Estimated Tax Payments

The federal government requires you to pay income tax throughout the year. A penalty is usually avoided by paycheck withholding or paying four estimated tax payments.

No penalty is assessed when four equal tax installments fall within $1,000 or 90% of your tax liability.

You also avert penalty with four equal tax payments totaling 100% of your tax liability in the preceding year. When your adjusted gross income for the year is greater than $150,000 – or $75,000 if married filing separately – pay 110% instead of 100%.

Estimated tax payments based upon your last tax return prevent the penalty but can create other problems. If your income for 2012 is higher than 2011, you owe more tax in April 2013. If your income is lower in 2012, you pay more than necessary as an interest-free loan to the government.

To resolve this, ask your certified public accountant (CPA) to calculate your 2012 estimated tax payments based upon the “regular installment method.” This computation requires you to provide your CPA with expected income and deductions for the entire year.

If necessary, you can make an estimated tax payment for one period in which you incur unexpected additional income.

Ask your CPA to determine an estimated tax payment based upon the “annualized installment method.” However, if you earn income throughout the year from which tax is not withheld, simply paying four equal payments is much easier. Determination of your tax each quarter is not possible without full-year estimates of income and deductions.