No deduction shall be made in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property
Investment in capital items such as computers, furniture, equipment and cars can cause confusion for small business owners. Since these are purchases that affect the cash flow of the business, it seems that they should be accounted for as expenses just as you would reflect office supplies or rent. There are however special rules for any acquisitions that qualify as “fixed assets”.
A fixed asset, simply speaking, is an acquisition that provides a long term economic benefit to the business. In other words, any business purchases that has a useful life that extends beyond one year, will usually qualify as a fixed asset.
From an accounting perspective, fixed assets as their category implies, are reflected as assets on the Balance Sheet. This means that they when they are initially entered into your accounting system, they will have no immediate impact on your bottom line. It is only with the passage of time that a portion of these costs become an expense, which requires an assessment regarding the useful life of the asset. For example you might purchase some computer hardware that you expect to use for about 3 years after which you will need to replace it. At the end of the 3 years, however, it may still have some value (you may be able to sell it) which is referred to as salvage value. This too needs to be evaluated. Once these factors are determined (since you are not psychic, they do not have to be exact – just reasonable) you have enough information to calculate your depreciation expense. The depreciation expense is the amount by which you reduce your fixed asset value on an annual basis.
Tax assessments are often difficult to understand (surprisingly the explanations can be insufficient and/or confusing). If you had an accountant file your tax return, it is a good idea to consult them upon receipt of an assessment. If you filed it yourself, and do not understand the assessment, you should call the government agency. They are usually eager to help, if not always illuminating. If you still do not understand it, it is probably best to then contact an accountant.Read More