To expense, or to depreciate?
Thursday, November 6th, 2008Okay, so perhaps that one never enters the gray matter. But, maybe it should, at least at some point, because restaurants make purchases like this all the time. A $300 meat slicer, here, a four-hundred dollar laptop there, and even an $89 cordless phone. All of these items are designed to last the business more than one year (that’s the theory, anyway). And because they are designed this way, tax geeks like me have to decide if they should be put on the profit and loss statement as an expense, or put on the balance sheet as what’s called a fixed asset. This is usually designated for big-ticket purchases of kitchen equipment like walk-in freezers, ovens, dishwashers, and other similar items.
Many restaurants like to show as much net income (income after all expenses) on their financial statements. As such, they would rather have any item, even relatively inexpensive ones like the phone, not show up on the profit and loss statement. Its cost digs directly in to the bottom line. And the phone will probably get you by until at least 2010 (unless you drop it in the fryer - ‘Mmmm, deep-fried phone’). That arguably meets the book and tax definition of a fixed asset.
So, whaddya gonna do? I usually advise my clients to pick a dollar amount over which questionable items will be booked as fixed assets, and under which they will be booked as small equipment purchases. As small equipment items, those costs go on the income statement instead of the balance sheet. They serve multiple purposes there: they allow your tax person to decide if they will remain as an expense on the income tax return or get put as a fixed asset, they provide a definitive cut-off point (perhaps $500 is the threshold) for the income statement versus balance sheet argument, and in some states where items such as this are subject to property taxes, they can be easily identified when preparing those statements for the city or county requiring them. For my clients, I use a category we call ‘smallwares’ so we know these are small-ticket pieces of equipment.
Now, back to reality. Go with the red Nano. From what the kids tell me, chicks dig the red ones.
