Wednesday, January 8, 2014

IRS Changes Deduction/Capitalization

Starting January 1st, companies face new regulations about whether spending on fixed assets is an expense or capitalized, which means the spending is depreciated over time. As with any other regulation, there are loopholes. For example, companies with audited financial statements can deduct $5,000 per invoice. This means an audited company could order 10 new computers at $4,900 each on 10 separate invoices and deduct the expense immediately. If the company made the same purchase on one invoice, the $49,000 would be capitalized and depreciated. Remember, while depreciation itself is not a cash flow, it does create important tax shield cash flows that we must take into account in capital budgeting.