| I often am asked this question by bookkeepers and | | | | business leases might go from year to year but if you |
| business owners alike. The Internal Revenue Service | | | | are staying beyond the term of the one year lease |
| defines a fixed asset as property used in a trade or | | | | (renewing your lease that is) those improvements |
| business or in an income producing activity that wears | | | | could be looked at having a life that meets the |
| out or becomes obsolete and it must have a | | | | definition of a fixed asset. |
| determinable useful life substantially beyond the tax | | | | Some examples of personal tangible fixed assets are |
| year. This might include tangible real estate property | | | | equipment, tools, office furniture, computer equipment, |
| and personal property and what is referred to as | | | | vehicles, etc. All purchases of these types of assets |
| intangible property. | | | | must be considered as fixed assets unless there will |
| Examples of tangible real estate property would be of | | | | be no residual value to them after one year. When |
| course buildings and the land they sit on as well as any | | | | considering the cost of an asset include all costs |
| improvements made to the property. And while land is | | | | involved in putting that asset into use. For example, if |
| considered a fixed asset, the IRS rules do not allow | | | | you purchase a computer system the fixed asset |
| the value of the land to be depreciated. Therefore, | | | | cost would include the CPU, monitor, and printer as well |
| with real estate property the value of the land is kept | | | | as any additional equipment purchased with the |
| in a separate balance sheet account from the value of | | | | computer that defines its use. |
| the building. Often in real estate transactions there are | | | | Intangible property could include copyrights or patents |
| closing costs and legal fees. The IRS may consider | | | | that would expand beyond a tax year. |
| these expenses to be part of the cost of buying the | | | | Remember the key to defining whether an item |
| building and will expect those costs to be added to the | | | | purchased is a fixed asset or an expense is the |
| value of the building and depreciated over the life of | | | | answer to this question: "Will this item have a |
| the building. Check with your tax preparer for further | | | | monetary value after being used beyond one year?". |
| clarification. | | | | And while a $5.00 screwdriver might have value to |
| If you rent space to operate your business in then the | | | | you far beyond one year I doubt you would be able to |
| rent is an expense that can be written off in the | | | | sell it hence it has no discernible monetary value. While |
| accounting period it is paid or accrued. However, | | | | making this decision think of the use of the item and |
| should you make improvements to your rental space | | | | the cost of purchasing the item. Usually items costing |
| then that expense is considered to be Leasehold | | | | less than $500.00 have no residual value after a year's |
| Improvements and if your lease extends beyond a | | | | use. And of course should you have any question at |
| year then those improvements would be looked at as | | | | all, check with your accountant or tax preparer. |
| fixed assets. Be careful with this one as some | | | | |