We will cover the financial statement rules in this article and will discuss the tax rules in part 2. Congress, however, has taken some of the fun out of auditing for IRS agents by periodically providing special Section 179 incentives that allow buyers to write off the costs of assets purchased in the year acquired. The IRS is wise to the temptation of calling asset purchases a “repair” and has issued regulations prescribing the proper treatment. If you are preparing an income tax return, you normally would like to minimize your income tax liability by showing every dime you spend as an expense. ![]() Just ask the guys at Worldcom, who faced a 3.85 billion dollar adjustment to income and prison sentences - what can happen if you go too far in this direction. The accountants who regulate accounting standards are wise to this and have created a set of standards for dealing with asset capitalization. This means you would prefer to capitalize every dime you spend for anything, and expense as little as possible. If you are preparing financial statements for the bank or a potential buyer of your business, you would like to show the highest income possible. The pressure to treat an item one way or another depends on what type of document is being produced from your accounting.įinancial Statements. There are two main ways to treat most expenditures: you can either capitalize them (by adding them as an asset on the balance sheet) or expense them (which means they reduce profit on the income statement). ![]() ![]() What do you do with those expenditures for software, website design, and vineyard development costs? How are you supposed to account for those? Capitalizing versus expensing You just bought a brand new iPad for your tasting room – is it an expense or an asset? And what about those new barrels that just arrived?Ĭompared to intangible assets, the hard assets are relatively easy to figure out.
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