You just bought a $4,500 trailer for the crew. Your $800 heavy-duty hammer drill finally gave out, so you replaced it. You also spent $200 on blades and bits for the jobsite table saw.
Question: Which of these hits your Profit & Loss statement this year, and which lands on your Balance Sheet?
For most general contractors and subcontractors, this isn’t a trivia question – it’s a tax mystery that costs real money. Misclassify an expense, and you miss out on immediate tax savings. Misclassify an asset, and you distort your job costs and working capital.
Welcome to the gray area of construction accounting.
Why Construction Breeds Confusion
Unlike a retail store that buys inventory to sell, construction firms buy tools to build. The line between what is consumed and what is owned long-term is blurry.
The IRS provides guidelines, but they aren’t always intuitive for a working PM or owner. Generally, items with a useful life of more than one year are capitalized (assets) and depreciated. Items consumed within a year are expenses.
But in the field, nobody thinks, “This $700 saw will depreciate over five years.” They think, “We need to cut lumber today.”
Here is how to draw the line and why your accountant, your tax bill, and your project margins will all thank you.
The Decision Tree: Asset or Expense?
When the receipt lands on your desk, run it through this three-question filter.
1. Does it have a life of more than one year?
- Yes: Likely an asset.
- No: Expense it now.
2. Does it cost more than your “capitalization threshold”?
- The IRS allows businesses to set a de minimis safe harbor election. This lets you deduct items up to $2,500 per invoice (or $5,000 with applicable financial statements) immediately.
- Practical application: If your policy is $2,500, that $4,500 trailer must be capitalized. The $800 hammer drill can be expensed immediately, even though it will last three years.
3. Is it a “component” or a “standalone”?
- Replacing the engine on an excavator? Expense (repair/maintenance).
- Buying a new excavator? Asset.
- Buying a new blade for a saw? Expense.
- Buying the saw itself? Asset (if over threshold).
The Gray Zone: Where Contractors Get Stuck
1. The “Small Tools” Trap
Many contractors have a “small tools” line item in their budget. They dump everything – $50 hammers, $1,200 rot hammers, $3,000 miter saws – into this account as a job expense.
The problem: Job costing becomes inaccurate. If you expense a $3,000 saw to Job A, that job looks less profitable than Job B, which didn’t need a new saw but used the saw every day.
The fix: Capitalize the major tools. Depreciate them. Then allocate a weekly or monthly rental charge to each job using that tool. Your P&L will finally reflect economic reality.
2. The Section 179 Opportunity
Just because you should capitalize an asset doesn’t mean you must depreciate it slowly. Section 179 allows you to deduct the full purchase price of qualifying equipment in the year it is placed in service.
Example: You buy a $50,000 skid steer. You can:
- Depreciate it over 5-7 years, or
- Deduct the entire $50,000 from this year’s taxable income (subject to limitations).
The catch: You need to have the profit to offset, and you need to track the asset properly in your books regardless of how you treat it on your tax return.
Real World Scenarios
| Item | Cost | Classification | Rationale |
| Used work truck | $28,000 | Asset | Useful life >1 year; exceeds threshold. Section 179 eligible. |
| Jobsite trailer | $4,500 | Asset | Exceeds typical $2,500 threshold. |
| Concrete forms | $6,000 | Asset | Reusable across multiple projects. |
| Table saw | $1,800 | Expense | Below threshold; de minimis safe harbor. |
| Blades & bits | $400 | Expense | Consumable; repair/maintenance. |
| Laptop for PM | $1,200 | Expense | Below threshold. (Yes, really – thank de minimis.) |
| Engine rebuild | $7,000 | Expense | Repair. Extends life but maintains existing asset. |
Why This Matters Beyond Tax Season
This isn’t just about April 15.
When you misclassify assets as expenses, you create three hidden risks:
1. You hide working capital.
Assets on your balance sheet represent value. If you expense everything, a lender or surety sees a weak balance sheet. You owned the $200,000 fleet but your books say you spent it all on soda and lightbulbs.
2. You distort job profitability.
Job A bought the saw. Job B used it for free. Your estimating database now thinks saws are free. Your next bid will be too low.
3. You lose planning power.
Depreciation is a non-cash expense. It reduces taxable income without reducing cash. If you don’t capitalize assets, you lose this powerful smoothing tool for high-profit years.
Building a Smarter System
The firms that navigate this gray area successfully don’t rely on memory. They build it into their workflow.
- Set a clear capitalization policy. Write it down. Share it with your office team and your field purchasers.
- Tag your tools. If an item is capitalized, assign a fixed asset number. Track it physically.
- Close the loop between AP and job costing. Ensure the same purchase isn’t coded as a “job expense” and an administrative asset.
Sources
- Internal Revenue Service. (2023, September 13). Tangible property final regulations. https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations
- Leichter, J. R. (2020, December 16). Is equipment a current asset? Aptora. https://www.aptora.com/blog/is-equipment-a-current-asset
- Keyser, B. (2024, November 20). Tax tips to optimize equipment depreciation in construction. KBS CPA. https://kbscpa.com/tax-tips-to-optimize-equipment-depreciation-in-construction/