What must be capitalized vs expensed?

Capitalize improvements that extend life, increase capacity, or adapt to new use. Expense maintenance that keeps property in operating condition. Document BAR analysis per invoice.

Bonus vs Section 179 in 2026?

Confirm phase and limits with CPA for 2026 law. Bonus applies by class and placed-in-service date; 179 has dollar and phase-out caps plus taxable-income limit. Model both with state decoupling.

What lives and methods apply?

Book under GAAP/IFRS policy; tax under MACRS. Track both ledgers — differences drive deferred taxes. Componentize material assets.

What does audit test?

Additions with invoices and placed-in-service proof, disposals with gain/loss, lives reasonableness, and physical existence on sample.

REPORTING

Fixed Assets and Depreciation in 2026: Capitalize, Depreciate, and Prove It

BATO Editorial Team September 27, 2026 3 min read

Policy That Prevents Restatements

Set threshold (e.g., $2,500/$5,000), BAR test, and placed-in-service definition in writing.

Pair with CapEx vs OpEx, Year-End Tax Planning, Year-End Close, and Chart of Accounts.

Lives and Methods Table

Asset	Book	Tax signal
Computers	3 years	5-yr MACRS
Furniture	5-7 years	7-yr MACRS
Leasehold	Shorter of life/lease	Amortize — see ASC 842
Software	3-5 years or SaaS expense	Confirm SaaS implementation guidance

Tie to IFRS 16 vs ASC 842 for ROU assets.

Rollforward Standard

Beginning + additions − disposals ± transfers = ending, tied to GL and subledger, with invoices, approvals, and reviewer sign — see Month-End Close and SOX 404.

Retain disposals with proceeds and gain/loss memo per Audit Procedures.

BAR Test in Practice (Betterment, Adaptation, Restoration)

The IRS BAR framework decides most disputes. Apply per invoice, per unit of property:

Betterment: does the spend make the asset better than when placed in service (not merely restored)? A $40k HVAC upgrade doubling efficiency capitalizes; a $4k like-for-like compressor is a repair.
Adaptation: new use (warehouse → clean room, office → restaurant kitchen) capitalizes regardless of cost.
Restoration: replacing a major component or substantial structural part (roof, full rewiring) capitalizes; patching a section does not.
Routine maintenance safe harbor: recurring work expected more than once in the asset’s class life (annual servicing, repainting on schedule) stays expensed — document the schedule.

The classic failure: splitting a $30k roof replacement into six $5k “repairs” to stay under the capitalization threshold. Auditors and the IRS both test for phase-splitting — aggregate by project, not invoice. Write the BAR conclusion in one line on the approval (“BAR: restoration — full roof replacement, capitalize”) and file with the invoice — see AP Fraud for approval discipline.

Book vs Tax: Worked Divergence

$120k server cluster, placed in service March 2026:

Ledger	Method	2026 expense
Book (GAAP)	5-yr straight-line	$18,000 (10 months)
Tax (MACRS + bonus, illustrative)	5-yr 200% DB + bonus per 2026 law	Up to $120,000 if fully bonus-eligible

The $102k gap is a deferred-tax liability, not an error — but only if both ledgers exist and reconcile. Companies tracking tax depreciation in a spreadsheet (or nowhere) can’t produce the provision support auditors require — see Year-End Tax Planning. Maintain the fixed-asset subledger with both columns from day one; reconstructing five years of MACRS at diligence costs more than the software.

Disposal Walkthrough (Sale of Equipment)

Sold a $50k machine (book NBV $12k, tax basis $4k) for $20k cash:

Remove cost and accumulated depreciation from both ledgers.
Book cash $20k; recognize book gain $8k, tax gain $16k (ordinary vs capital character per asset class — confirm).
Retain: bill of sale, board approval if material, proceeds receipt, gain memo tying both ledgers.
Update insurance schedules and property-tax renditions the same month — stale schedules overpay both.

Unrecorded disposals (sold, scrapped, or missing assets still depreciating) are a top physical-existence finding — tie the subledger to the Inventory Observation-style count discipline annually.