# Corporate Accounting ## Depreciation and amortization Resources **Wave: How do I handle depreciation?** [https://www.waveapps.com/blog/depreciation-camera-photography-equipment](https://www.waveapps.com/blog/depreciation-camera-photography-equipment) **Wave: Depreciation in Wave** [https://support.waveapps.com/hc/en-us/articles/208623506-Depreciation-in-Wave](https://support.waveapps.com/hc/en-us/articles/208623506-Depreciation-in-Wave) **Xero: How Xero calculates depreciation** [https://central.xero.com/s/article/How-Xero-calculates-depreciation-US-GL](https://central.xero.com/s/article/How-Xero-calculates-depreciation-US-GL) **Xero: Depreciation schedule** [https://central.xero.com/s/article/Depreciation-Schedule-new?userregion=true](https://central.xero.com/s/article/Depreciation-Schedule-new?userregion=true) **QuickBooks: Depreciate assets in QuickBooks Online** [https://quickbooks.intuit.com/learn-support/en-us/help-article/liability-accounts/depreciate-assets-quickbooks-online/L5UV9dNoI_US_en_US](https://quickbooks.intuit.com/learn-support/en-us/help-article/liability-accounts/depreciate-assets-quickbooks-online/L5UV9dNoI_US_en_US) **QuickBooks: How to calculate depreciation: Definition, types, and formulas** [https://quickbooks.intuit.com/r/bookkeeping/depreciation/](https://quickbooks.intuit.com/r/bookkeeping/depreciation/) ## Capitalization threshold for GAAP: Based on materiality **Claude Opus:** >- Under Generally Accepted Accounting Principles (GAAP) in the United States, companies set their own capitalization thresholds based on materiality. >- The threshold is often between $1,000 and $5,000, but it can be higher or lower depending on the company's size and the nature of its assets. ## Capitalization threshold for taxes: "De minimis safe harbor" of $2500 **Summary** - Item which cost under $2500 can be directly deducted in the - This threshold increases to $5000 if you have an "applicable financial statement" (AFS), which is basically some audited financial statement filed with the government. It includes a 10-K, annual report, report from independent Certified Public Accountant (CPA), or financial statement (other than a tax return) required to be provided to the federal governtment, or a state government, or a federal or state agency (but not the SEC or the IRS). > Effective for taxable years beginning on or after Jan. 1, 2016, the Internal Revenue Service in [Notice 2015-82](https://www.irs.gov/pub/irs-drop/n-15-82.pdf)PDF increased the de minimis safe harbor threshold from $500 to $2500 per invoice or item for taxpayers without applicable financial statements. In addition, the IRS will provide audit protection to eligible businesses by not challenging the use of the $2,500 threshold for tax years ending before Jan. 1, 2016, if the taxpayer otherwise satisfies the requirements of Treasury Regulation § 1.263(a)-1(f)(1)(ii) > > **What is the de minimis safe harbor election?** > > Under the final tangibles regulations, you may elect to apply a de minimis safe harbor to amounts paid to acquire or produce tangible property to the extent such amounts are deducted by you for financial accounting purposes or in keeping your books and records. If you have an applicable financial statement (AFS), you may use this safe harbor to deduct amounts paid for tangible property up to $5,000 per invoice or item (as substantiated by invoice). If you don't have an AFS, you may use the safe harbor to deduct amounts up to $2,500 ($500 prior to Jan. 1, 2016) per invoice or item (as substantiated by invoice). > > These limitations are for purposes of determining whether particular expenses qualify under the safe harbor; they aren't intended as a ceiling on the amount you can deduct as business expenses under the IRC. > > The de minimis safe harbor election does not include amounts paid for inventory and land. Additionally, it does not apply to rotable, temporary, and standby emergency spare parts that the taxpayer elects to capitalize and depreciate under § 1.162-3(d). It does not apply to rotable and temporary spare parts that the taxpayer accounts for under the optional method of accounting under § 1.162-3(e). > > Neither the IRC nor prior regulations included a de minimis safe harbor exception to capitalization; you were required to determine whether each expenditure for tangible property, regardless of amount, was required to be capitalized. The de minimis safe harbor election eliminates the burden of determining whether every small-dollar expenditure for the acquisition or production of property is properly deductible or capitalizable. If you elect to use the de minimis safe harbor, you don't have to capitalize the cost of qualifying de minimis acquisitions or improvements. However, de minimis amounts you pay for tangible property may be subject to capitalization under §263A, if the amounts include the direct or allocable indirect costs of other property you produced or acquired for resale. For example, you must capitalize all the direct and allocable indirect costs of constructing a new building. Source: https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations ## Differences between GAAP and Tax accounting **Claude Opus:** *Yes, Generally Accepted Accounting Principles (GAAP) can differ from the rules used for tax accounting purposes. The primary reason for this difference is that GAAP is designed to provide a fair and accurate representation of a company's financial performance to investors and other stakeholders, while tax accounting rules are designed to determine the amount of taxes a company owes based on the tax laws and regulations set by the government.* *Some key differences between GAAP and tax accounting include:* 1. *Timing of revenue and expense recognition: Under GAAP, revenue is typically recognized when earned and expenses when incurred. For tax purposes, revenue and expenses may be recognized on a cash basis or when received and paid, depending on the company's chosen method.* 2. *Depreciation methods and lives: GAAP allows companies to choose from various depreciation methods (e.g., straight-line, accelerated) and estimate useful lives based on their experience and judgment. Tax accounting often prescribes specific depreciation methods and lives based on the type of asset.* 3. *Allowable deductions: Some expenses that are recognized under GAAP may not be deductible for tax purposes, such as certain entertainment expenses or fines and penalties.* 4. *Valuation of inventory: GAAP permits various inventory valuation methods (e.g., FIFO, LIFO, weighted average), while tax accounting may require a specific method to be used consistently.* 5. *Treatment of certain transactions: Some transactions, such as business combinations or leases, may be treated differently under GAAP and tax accounting rules.* *==Due to these differences, companies often maintain separate books for financial reporting (under GAAP) and tax purposes.== They also reconcile the differences between GAAP and tax accounting through a process called "book-tax reconciliation" to determine their taxable income and tax liability. Public companies are required to disclose significant differences between their GAAP and tax accounting in their financial statements.* ### Capitalizing trademarks **Differences** - GAAP: The trademark is kept on the balance sheet at its original cost and assessed annually for "impairment". - Tax: The trademark is amortized over 15 years using the straight-line method. **To track the book-tax differences:** 1. Create a deferred tax asset or liability account: The difference between the book and tax treatment of the trademark will result in a deferred tax asset or liability. If your tax amortization is greater than your book amortization (which is zero), you will have a deferred tax liability. Conversely, if your book amortization is greater than your tax amortization, you will have a deferred tax asset. 2. Record the deferred tax: Each year, calculate the difference between the book and tax amortization and record the corresponding deferred tax asset or liability. 3. Maintain a reconciliation schedule: Keep a separate schedule that reconciles your book income to your taxable income. This schedule should include the trademark amortization difference and any other book-tax differences. 4. Use tax accounting software: Consider using tax accounting software that can help you track and calculate book-tax differences automatically.