Revenues for taxation are reduced by current operating expenses and recognition of the reduction of useful life of assets by the means of depreciation. Depreciation is the allocation of cost of an item over several operating periods that may be provided by an asset such as a auto, furniture, equipment and other items that provide benefits for more than the operating period or year of operations. Depreciation can be different for books and taxes and as such timing differences may also be an issue with a depreciable asset. Companies with a lot of revenue would most likely be more aggressive in the recognition of depreciation since they would have potentially more income tax liability and to reduce this taxation would want to recognize the cost of items purchased by accelerated means of depreciation to reduce taxes. Companies with lower revenue streams would be more likely to capitalize and reduce the recognition of an assets reduction in life as the income would be lower and the need to reduce income taxes not as great an issue. For tax purposes there is an election referred to as Section 179 depreciation which an asset must qualify for under rules set by the IRS for both type and cost with a ceiling on the total cost put in service during any tax year. With Sec-179 the total cost of an asset purchase can be expensed in the current operating cycle even if the asset provides benefits for many periods after the year of purchase. This would then establish a difference between book and tax records and would be recognized as such. Assets make your balance sheet look more impressive and expenses will reduce your income tax liability. In a lot of instances a lease must be treated as a purchase and therefore capitalized on the books of the company and is subject to the same recognition rules as if the item were purchased outright.
How Are Revenue And Capital Expenditures Treated In Taxation? Would A Company Prefer To Invest In Capital Expenditure Or Acquire Assets Through Lease/hire Purchase To Make It Into A Revenue Expense?
It depends. While you can take a tax deduction on the entire expense of leasing or renting. Buying a capital asset lets you depreciate the cost over 3 to 4 years.