Publication 911 |
2000 Tax Year |
Capital Expenses
You must capitalize some costs rather than deduct them. These costs
are a part of your investment in your business and are called
"capital expenses."
Although you generally cannot take a current deduction for a
capital expense, you may be able to take deductions for these costs
over a period of years as explained later under Cost
Recovery.
Kinds of Capital Expenses
You must capitalize the following costs.
- Going into business. The costs of getting started
in business, before you are authorized to start selling your company's
products, are capital expenses. These include the cost of exploring
different direct-selling opportunities, the cost of any training you
must have before becoming a direct seller for your product line, any
fees you must pay to the company to become a direct seller, and
similar costs. See chapter 9 of Publication 535
for information on how
to treat these costs.
- Business assets. The cost of any asset (property)
that will last substantially beyond the tax year it is placed in
service is a capital expense. Examples of business assets include:
office furniture, business vehicles, and storage shelves. See
Cost Recovery, later.
- Improvements. The costs of making improvements to
a business asset are capital expenses if the improvements add to the
value of the asset, appreciably lengthen the time you can use it, or
adapt it to a different use. However, normal repair expenses are
deducted as current business expenses and are not capitalized. For
example, if you have a car you use only for business, maintenance and
repair costs; such as tune-ups, new headlights, or brake repairs, are
business expenses. The cost of overhauling the engine, however, would
be a capital expense.
Demonstrators
If you keep your company's products on hand to show to potential
customers, their cost may be part of the cost of goods sold, a capital
expense, a business expense, or a personal expense, depending on the
circumstances. The cost of a product you use yourself is a personal
expense, even if you occasionally show it to prospective customers.
Example.
Sheila is a direct seller who uses many of the products in her own
home. When potential customers come to her house, she can show them
drapes she bought from the company, as well as her lawn chairs,
toaster, grill, tea set, and spice cabinet. By showing these items in
her own home, she hopes to interest people in buying from her company
or in becoming direct sellers themselves.
Sheila cannot take a deduction for the cost of any of these
products. Because she uses them in her own home for personal reasons,
their cost is not a cost of doing business.
One year or less of use.
If you have a product you use as a demonstrator for one year or
less and the demonstrator itself is not available for purchase by your
customers, its cost is a business expense.
If the demonstrator itself can be bought by your customers, include
it in your inventory.
Example 1.
Constance is a direct seller of kitchenware. Customers must order
items from a catalog, but she keeps at least one of each type on hand
to show buyers. When her product line changes and an item is
discontinued, she either starts using the demonstrator in her own
kitchen or tries to sell it. When she had a garage sale she sold a
number of unused demonstrators.
Constance includes her demonstrators, including those for
discontinued products, in her inventory of goods for sale. When she
sells a demonstrator, including those she sold at the garage sale, she
includes the income in her gross business receipts.
When Constance starts using a demonstrator in her own kitchen, it
is a withdrawal of inventory for personal use. She subtracts the cost
of the item from her purchases for the year, as discussed under
Cost of Goods Sold, earlier.
Example 2.
Lydia sells needlework kits at sales parties. She has catalogs and
a number of kits to show customers. She uses these kits to demonstrate
various needlework techniques.
The demonstrator kits last less than one year and are not sold to
customers. Some are ruined and thrown away. Their cost is a business
expense.
More than one year of use.
If you use a demonstrator for more than one year, its cost is a
capital expense. However, if you expect to eventually sell the
demonstrator, include it in your inventory of goods for sale.
Example 1.
Mike sells educational books door-to-door. He carries copies of the
books to show. If someone wants a book, he takes a deposit and
delivers the book at a later time.
Because his product line changes little from year to year, Mike can
use a book as a demonstrator for a long time. Although he periodically
replaces his demonstrators with new ones and sells the old ones at a
discount, he has kept some books as demonstrators for up to 3 years.
Because Mike eventually sells his demonstrators, they remain part
of his inventory of goods for sale.
Example 2.
Janet sells the same line of educational books as Mike in
Example 1. She tries to use her demonstrators as long as
possible. She puts the books in plastic jackets to protect them, and
ordinarily only stops using them as demonstrators when the company
comes out with a new edition. Janet never sells the old demonstrators.
She can recover the cost of the books she uses as demonstrators as
discussed under Cost Recovery, next.
Previous| First | Next
Publication Index | IRS-Forms Main | Home
|