Record Keeping Basics
Tools for record keeping
Audit proof your business - Internal records
Summary of required documents
Expense or Asset?
An expense is deductible in full in the year the expense is incurred. On the other hand, an asset has future value and is expensed over its estimated life.
The tax code allows you to deduct all ordinary and necessary expenses in carrying on your trade or business. However, you are also required to to deduct over multiple years (capitalize) the costs of purchasing and improving assets regardless of cost. This means a purchase that will last 3 years will be expensed over 3 years even if it only cost you $10.
Taxpayers are allowed to make an election to expense in one tax year expenses under $2,500 per invoice. This is called the de minimis safe harbor election.
De minimis safe harbor election
The de minimis safe harbor election eliminates the burden of determining whether an asset purchase should be expensed in one year or over multiple years.
The election must be made each year and attached to your tax return.
Also, you must document your policy and keep with your tax records.