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Hi there,
I have a small farm, and have a question about whether to record some things purchased as expenses or assets. For example, one of my purchases was some stainless still racks with the purpose of using them to grow seed starts on. The racks were approximately $120 each. Would I need to record these as an asset, or can I expense them, and if so what account should I record the entry? Another example would be purchasing tools like power drill or other equipment like trays for starting plants to transplant, would those be an asset or can I record them as an expense?
I appreciate the help.
You have options. The IRS allows you to expense tangible property up to $2,500 per item or invoice. It's known as the de minimis safe harbor. If you do that, you need to attach a statement to your tax return stating that you elected to use the safe harbor for that tax year. Therefore, you need to be consistent with applying the $2,500 threshold for items purchased throughout the year. You can't choose to expense to drill and capitalize (record as an asset) the racks. You can elect to apply the safe harbor one year and not the next or elect to use it every year.
You can also choose to capitalize the purchases and expense (depreciate) them over time. This may be advantageous if you expect your income to increase because tax deductions are more valuable the higher your income tax bracket. You can also capitalize the purchases and then depreciate them 100% using Section 179. Presumably, you have a CPA or tax accountant that can help you determine the best option. If you're unsure, you can record them as fixed assets when you purchase them and then reclassify them as expenses or apply Section 179 at year-end based on the advice of your CPA/tax accountant.
Thanks for the advice! I guess the chart of accounts I would put those things in would be "Small tools and Equipment"?
Along the same line, a small walk-in cooler was purchased for under that $2500 amount, so I guess I could use the de minimus safe harbor for that as well then, correct?
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