What is in a name? A piece of furniture is furniture no matter how you slice it. Not quite for tax purposes. If you are not careful that may be a tax problem in the making. Tax practitioners such as CPA's, tax attorneys or enrolled agents may not have a problem avoiding those problems but the layman my not know when to capitalize vs depreciate.
Typically, if you own a business and you buy furniture your CPA will classify those as depreciable assets and depreciate the furniture over the useful life of the assets say seven years.
What about a furniture store which buys furniture to sell it to others? Is the furniture that he buys capital items that need to be capitalized and also depreciated over seven years, knowing that the furniture that he bought today may be sold tomorrow or the next week? This will be madness, wouldn't it?
How then should the furniture store treat the furniture that they buy? Let us assume that the furniture store buys and sells desks only. The store should classify those desks as inventory purchase and it should be deducted from the sale price. So, if the store sold one hundred dollars of furniture and it cost it seventy thousand dollars to buy the furniture, the full cost of the desk should be deducted.
For entertainment purposes, let us pose this question: Suppose the store has desks in the office for employees to use, how should the store treat the two hundred dingy desks that it uses in the office? Believe it or not, technically speaking the store should capitalize those desks and depreciate it over say seven years say at thirty dollars a year. Crazy isn't it? It is the law that many will ignore in the midst of a day’s work.
Issue gets a little complicated when it comes to real estate. Every one knows that real estate structures are big, very big, and almost always depreciated over say thirty years. Let us ask this question then, what if a guy buys ten buildings every year and flips immediately? He may buy them tomorrow and sell them the next day. That is all he does. He buys them to sell them and never to rent them. Does this guy have capital assets or an inventory of buildings like pencils or bubble gum in the store?
In fact our investor has no more than bubble gum. Those buildings for that purpose are not a capital item. They are an inventory. The cost should be deducted immediately and not capitalized.
We have represented clients who were real estate investors in tax audits. They did just the opposite. They had reported the rental real estate properties as bubble gum. When in fact they bough those assets to rent and to last over the years and thus rental property should have been depreciated.
They reported the property on schedule C which is reserved for bubble gum. Rental property should be reported on Schedule E.