Every business has expenses, including manufacturing costs, rent, furniture, light bills and vehicles. These are all the goods and services that you need to keep the business running. The IRS lets you deduct these expenses in total, in part or over time, depending on how the expense is classified.
Classifying business expenses isn’t rocket science, but it can get tricky. The following information can help you sort it out.
Current Expenses. These are the day-to-day costs that enable you to stay in business, like rent, paper and pens. A small business can subtract these expenses from gross income during the tax year in which at the expense was incurred.
Capital Expenses. These are assets a business purchases that create lasting value and extend the useful life of or improve property. Buying a building, for instance, is a capital expense. Removing graffiti would be a current expense.
The IRS considers capital expenses to be investments in the business, because they add value and don’t disappear the way a ream of paper does. Capital expense deductions occur over several years. It’s called capitalization, amortization or depreciation.
Improvements vs. Repairs. Differentiating between improvements and repairs begins to get a bit more complicated. Buying a shed for the business, say, is a capital expense, while repairing a broken window is a current expense. If, however, you add plumbing to the shed, the cost of that improvement is capitalized over several years. A modification of property or equipment is considered an improvement when it increases an asset’s value, enables a new use or extends the useful life of an asset.
If you need help sorting out your expenses to ensure that you’re classifying them correctly, give us a call today. You’ll be able to better track the growth of your business and stay on the right side of the IRS.
We welcome the opportunity to put our accounting expertise to work for you. To learn more about how our firm can help advance your success, don’t hesitate to contact Kathy Corcoran at (302) 254-8240.
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