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Construction – Tools & Tax Tips

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In the construction industry, for tax purposes, you do treat the purchase of a hammer and a cement mixer differently.  Sure you may view them as “tools of the trade” – but the IRS thinks differently!

Construction is by nature a tool driven industry.  Buying and providing them can get expensive.  But how do you know when you can expense a tool and when you should capitalize a tool and depreciate (expense) it over time?  Here are a few tips.

First off, let’s define expenses from the tax perspective.  Any business expense that is considered to be ordinary and necessary is deductible.  An “ordinary” expense is considered to be something that is common and accepted in your industry – in this case, the construction industry.   To be considered “necessary”, an expense should be helpful and appropriate for your industry.  It does not have to be indispensable to qualify or classified as necessary.

Second, let’s talk about capitalization and deprecation.  When a tool is considered to be durable or useful beyond one year, it is typically capitalized (recorded as an asset on the balance sheet) and depreciated (expense is split out over several years instead of just one).

Here are a few examples of tools that are deductible in the year of purchase:

  • Small tools expected to last one year or less
  • Steel toe work boots

Here are a few other common business expenses that you will want to keep track of:  Utilities, Car and truck expenses (like maintenance), Advertising, Employee salaries, Trade association dues, Rent expense, Supplies, Continuing education, and Business licenses…to name a few.

Here are a few examples of tools and equipment that you would most likely capitalize and depreciate:

  • Cement mixer
  • Compressor
  • Ladder
  • Other heavy machinery

To complicate matters, you can elect to expense a capital item in the year purchased using Section 179 Depreciation rules.  That can get a little complicated so I’d advise that you check with a tax professional on those rules and if you should exercise them or capitalize and depreciate the asset.

Tools and taxes can be sticky and complicated but it really doesn’t have to be.

Look at the asset and be honest… is it durable beyond one year or not?  If yes, capitalize it.  If no, expense it.

We hope you’ve found today’s blog post to be helpful, if so please leave a comment or share it on your favorite social media platform using the buttons below.

 


About the Author:

Joyce M. Washington is a CPA who has spent the better part of almost 20 years honing her craft as an accountant with various companies in the Greater Baltimore-Washington, DC area – growing, mentoring and managing accounting teams. It’s this experience that she brings to services and training programs, including QuickBooks Basics.

Website: http://www.thecommoncents.com

Facebook: http://www.facebook.com/thecommoncents

Twitter: http://www.twitter.com/thecommoncents

2 Responses to Construction – Tools & Tax Tips

  • If it were me, I would create a new sub-account under Cost of Goods Sold – called “Small Tools” and assign things like hammers, screwdrivers, these saw blades, and anything else like this.

  • Friend has a installation (flooring) business. He uses a table saw. If he buys 10 blades for the next 6 -10 jobs (more cost effective to buy in bulk), how would that expense be categorized in Quickbooks 2016? There is no category for tools under expense. Or would they be considered cost of goods since each blade is sometimes used only for one job?

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About Your Host:

Nancy Smyth, Certified QuickBooks ProAdvisor

Nancy Smyth, Sunburst Software Solutions, Inc.
QuickBooks Construction & Payroll Expert


I've been using and supporting QuickBooks products since the early 1990's. I've worked with thousands of contractors, assisting them with QuickBooks setup, Certified Payroll Reporting requirements, AIA Billing and Weighted-Average Overtime.


QuickBooks is a powerful product, but learning how to use it in your construction business can be difficult. I hope you find resources available here to be helpful.

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