The short answer
A purchase is generally expensed when it is a supply used up within a year or a small item, and capitalized as an asset when it lasts longer and costs more. The IRS de minimis safe harbor lets a business that elects it each year deduct items up to $2,500 per invoice or item, or $5,000 with an applicable financial statement, when the books expense them the same way. Depreciation elections belong with your CPA.
Why this decision shows up every month
A new laptop, a box of printer paper, a ladder, a roof repair, a used truck. Each one is a business purchase, and each has to land somewhere in the books. When a purchase is expensed, it shows up on this month's profit and loss as a cost. When it is capitalized, it goes on the balance sheet as an asset and its cost is spread over time through depreciation.
Owners often call both a "write-off," and the tax deduction may or may not match what the books show. The bookkeeping job is to code each purchase consistently under a policy and keep the records behind it. The tax treatment, including depreciation and any elections, is your CPA's call. The IRS tangible property regulations set the framework both of you work from.
Materials and supplies
The IRS treats some purchases as materials and supplies: tangible property, other than inventory, that is used and consumed in your operations. A purchase needs to fit only one of these categories:
- Acquired components bought to maintain, repair or improve property you own, lease or service, and not bought as part of a larger item
- Consumables such as fuel, lubricants and water, reasonably expected to be used up within 12 months
- 12-month property, meaning tangible property with an economic useful life of 12 months or less
- $200 property, meaning tangible property that cost $200 or less to buy or produce
The de minimis safe harbor
The de minimis safe harbor is an election that lets a business deduct low-cost purchases of tangible property without deciding item by item whether each one must be capitalized. If you do not have an applicable financial statement (AFS), the limit is $2,500 per invoice or item, as shown on the invoice. With an AFS, it is $5,000. The IRS raised the non-AFS limit from $500 to $2,500 for tax years beginning on or after January 1, 2016.
An AFS is not an everyday set of books. The IRS describes it as a financial statement filed with the SEC, a certified audited statement with a CPA report (for example, one provided to a lender), or a statement required by a government agency other than the IRS or the SEC. Most small businesses do not have one, so the $2,500 limit is the one that usually applies.
The safe harbor follows your books. It applies only to amounts you also expense in your books under a consistent accounting policy that exists at the beginning of the tax year. Without an AFS, the policy does not have to be written, but it does have to exist and be followed. It does not cover inventory or land. Your CPA makes the election each year by attaching a statement to the timely filed return, including extensions, and once elected it applies to every purchase that qualifies that year. Purchases above the limit are not automatically capitalized. They simply go through the normal rules.
| If the purchase is | Usually recorded as | Why |
|---|---|---|
| A supply used up within 12 months, or an item costing $200 or less | Materials and supplies expense | It fits the IRS definition of materials and supplies |
| $2,500 or less per invoice or item, with the safe harbor elected | An expense, if your book policy expenses it | De minimis safe harbor; the limit is $5,000 with an applicable financial statement |
| Inventory you will resell, or land | Inventory or a land asset | Both are excluded from the de minimis safe harbor |
| Above your policy amount and lasting more than a year | A fixed asset on the balance sheet | Normal capitalization rules; your CPA decides depreciation, Section 179 or bonus |
| Work that betters, restores or adapts property | An improvement, capitalized | IRS improvement rules; a safe harbor may allow some to be deducted |
| Routine upkeep that keeps property running | Repairs and maintenance expense | Not an improvement; the routine maintenance safe harbor may apply |
Repairs or improvements
Work on property you already own raises a different question: is it a repair you expense, or an improvement you capitalize? The IRS says a unit of property is improved only if the money spent is for a betterment, a restoration, or adapting the property to a new or different use. For a building, the test is applied to the structure and to each key building system, such as the plumbing, electrical or HVAC system, rather than to the building as a whole.
The regulations also offer simplifying options, including a safe harbor for routine maintenance and a safe harbor election for small taxpayers with building property. Whether a given repair fits one of them is your CPA's call. What the books need is a clear description on each invoice: what was done, to which property, and why. "Roof work" is hard to classify later. "Replaced 20 damaged shingles after a storm" is not.
Write a capitalization policy and keep a fixed asset list
Even when it does not have to be written, a short written capitalization policy makes month-end coding consistent, and it shows what your policy was at the start of the year. A typical small business policy states the dollar amount above which purchases are capitalized, whether that amount applies per invoice or per item, how repairs are described, and the date the policy took effect. Your CPA can set the amount so it lines up with the tax election.
Everything that is capitalized goes on a fixed asset list. IRS Publication 583 says your asset records should show:
- When and how you acquired the asset, and the purchase price
- The cost of any improvements
- Any Section 179 deduction and depreciation taken
- How you used the asset
- When and how you disposed of it, the selling price and the expenses of sale
Depreciation, Section 179 and bonus depreciation belong with your CPA
Once an asset is on the list, how fast its cost is deducted is a tax decision. P.L. 119-21, the 2025 law the IRS calls the One Big Beautiful Bill Act, reinstated the 100% special depreciation allowance (often called bonus depreciation) for certain qualified property acquired and placed in service after January 19, 2025, with an election to take a smaller percentage instead. Section 179 has its own annual dollar limits. Which of these your business uses, and for which assets, is for your CPA to decide. The depreciation in your books may differ from the depreciation on your return.
Keep those records with the rest of your files for as long as the IRS says to, which for property is until the period of limitations ends for the year you dispose of it. See how long to keep business records. At year end, the fixed asset list and the year's purchase invoices go to your CPA as part of the year-end handoff.
Setting up asset accounts in a chart of accounts you'll read, coding purchases each month and keeping the fixed asset list current are part of small business bookkeeping at Danielson Bookkeeping & Consulting. The firm does not choose depreciation methods or make tax elections.
