English
Español
Filing taxes as a small business is often complicated and confusing. If you make a mistake, it can result in losing a significant amount of money, and even penalties in some cases. Determining when you can deduct specific expenses is one area where small business owners often run into trouble. This blog post will help explain the difference between current and capital expenses and how they will impact your tax filings.
Deducting Expenses
Current and capital expenses related to the timeframe a specific expense can be deducted on your tax return. In some cases, your small business can deduct an expense only in the year that it was purchased, which are called current expenses. Other types of expenses, called capital expenses, must be deducted over the course of several future years.
Understanding Current Expenses
Current expenses are typically the normal, everyday costs of running your business. This would include things like rent payments, internet bills, electric bills, and many others. When deducting these expenses, you simply subtract the amount spent on each one from the gross income of the business in which the expense was incurred.
Understanding Capital Expenses
Business expenses that are meant to help the company grow over time are deducted differently. These are usually large expenses and include things like purchasing buildings, major equipment, vehicles, and many more. Rather than deducting the full cost of these items the year they were purchased, the business will deduct the cost over the course of several years. While there are exceptions to this, items that are used for more than one year will typically be considered capital expenses.
Depreciation
When dealing with capital expenses, you need to understand a concept known as depreciation. This is when the value of an item goes down over time. This decrease in value can be “written off” or deducted on your tax return to help reduce the overall tax burden of a business.
Common Situations
In most situations, it is fairly easy to know the difference between a current and a capital expense. There are some common situations, however, that go outside the basic rules regarding deducting expenses. These include:
- Section 179 Deduction – The first “oddity” to be aware of is known as a section 179 deduction. This is where a business is permitted to write off many types of capital expenses in its first year, up to $500,000. This allows new businesses to significantly increase their deductions in year one to help offset expenditures.
- Repairs vs. Improvements – Expenses related to repairing assets such as vehicles, buildings, and other important equipment will be considered current expenses and deducted in the year that the expense occurred. Expenses related to improving assets (such as expanding a building, for example) can be considered a capital expense.
- Others – There are a variety of other unique situations where the deduction won’t necessarily fall into the category that one would assume. Working with an experienced accountant or other financial professionals can help ensure all deductions are properly handled.
Weisberg Kainen Mark, PL
Latest posts by Weisberg Kainen Mark, PL (see all)
- The Tax Implications of Securities Fraud - April 15, 2024
