Depending on your business, you may need to make some large expenses and deduct asset costs. How are those treated as deductions? In this post, you’ll learn how to ‘capitalize’ a deduction.
Capitalizing is the main way to deduct the value of an asset. For instance, take a $10,000 truck for your lumber company. The IRS considers anything above $2500 to be a capital asset. Ten thousand dollars more than meets the qualifications here, so we can deduct a portion of that truck over its useful life every year. Whenever you hear capitalize, think ‘deduct a chunk of it every year until it’s all been deducted’.
There is a table to help you determine the ‘useful life’ of different things as it is commonly accepted by the tax authorities. This table is called the MACRS table, or (Modified Accelerated Cost Recovery System). A table of it is located in IRS Publication 946. Page 28 of that document lists trucks as having a 5-year recovery period using both depreciation systems, so that means the $10,000 truck would have $2000 deducted each of five years:
How to Deduct Asset Costs for a Truck
| Year (depreciated) | Amount Depreciated | Total |
| 1 | $2000 | $2000 |
| 2 | $2000 | $4000 |
| 3 | $2000 | $6000 |
| 4 | $2000 | $8000 |
| 5 | $2000 | $10,000 (yay, you’re done) |
There are different types of assets that you can capitalize over their lifetimes that are worth considering. Rent-to-own properties, tech equipment, Appliances (plus carpets & furniture) used in a residential real estate activity, Office furniture and fixtures.
As your bookkeeper, I might not give you high-level tax strategy, but I can make sure your expenses are organized and categorized properly so your CPA can easily identify things you can capitalize for the highest deductions possible. Every untracked asset leads to overpaying on your taxes. Call me to schedule a bookkeeping strategy call.
There are even ways to deduct the entire cost of an asset within the first year of purchasing it, or to even deduct the cost of an asset worth less than $2500, which you can learn about in a future post.