Current vs. Capital Expenses

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Tax rules cover not only what expenses can be deducted but also when they can be deducted. Some types of expenditures are deductible in the year they are incurred but others must be taken over a number of future years. Generally, current expenses are everyday costs of keeping your business going, such as the rent and electricity bills. Deducting current expenses is fairly straightforward; you subtract the amounts spent from your business’s gross income in the year the expenses were incurred. Asset purchases, such as the cost of equipment, land, and vehicles, are treated as investments in your business, since they are expected to generate revenue in future years. They must be deducted over a number of years, or capitalized, as specified in the tax code. This allows the business to more clearly account for its profitability from year to year. The general rule is that if an item has a useful life of one year or longer, it must be capitalized.

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