Is a Phone an Asset or an Expense for Your Business?
Understand whether a phone is an asset or an expense for your business by exploring its classification, depreciation, and impact on financial statements.
A phone is essential for most businesses, but whether it’s classified as an asset or an expense depends on its use and accounting treatment. This distinction affects financial statements, tax deductions, and budgeting decisions.
Understanding where a phone fits into a company’s finances requires examining its classification, depreciation, and impact on the balance sheet.
Tangible Asset Classification
A phone purchased for business use is generally considered a tangible asset because it has a physical form and provides ongoing economic benefits. Under Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), tangible assets are items used in operations and not intended for immediate resale. Since a phone facilitates communication and daily operations, it meets this definition.
Whether a phone is recorded as an asset depends on its cost and expected lifespan. Many companies set capitalization thresholds, meaning only purchases above a certain amount are recorded as assets. If a company has a $2,500 threshold, a $1,200 phone would be recorded as an expense instead. The IRS follows similar guidelines under Section 263(a) of the Internal Revenue Code, requiring businesses to capitalize expenditures that provide future benefits. However, the De Minimis Safe Harbor Election allows businesses to expense items under $2,500 per invoice or item, simplifying record-keeping for lower-cost purchases.
Depreciation Considerations
When classified as an asset, a phone’s cost must be spread over its useful life through depreciation rather than deducted all at once. This aligns with the matching principle in accounting, ensuring expenses are recognized in the same period as the revenue they help generate. The IRS assigns a five-year recovery period to business-use mobile phones under the Modified Accelerated Cost Recovery System (MACRS), allowing companies to deduct a portion of the cost each year.
Businesses can choose different depreciation methods based on their financial strategy. The straight-line method evenly distributes the cost over five years, making it simple and predictable for budgeting. The double-declining balance method accelerates deductions, front-loading depreciation expenses in the earlier years. This approach benefits businesses looking to reduce taxable income sooner.
Section 179 of the Internal Revenue Code allows businesses to deduct the full cost of a phone in the year it is purchased, provided total Section 179 deductions for the year do not exceed $1,220,000 in 2024. This is particularly useful for small businesses seeking immediate tax savings. Additionally, the 100% bonus depreciation rule, available through 2026, permits full expensing of eligible assets in the first year, though this percentage will begin phasing out in 2027.
Balance Sheet Effect
Recording a phone as an asset increases total assets on the balance sheet, reflecting ownership of valuable resources. It appears under property, plant, and equipment (PP&E) or a similar fixed asset category, depending on the company’s accounting structure. Unlike expenses, which immediately reduce net income, capitalizing the phone preserves profitability in the short term by spreading the cost over multiple periods.
The purchase method also affects financial statements. If a company buys a phone outright, cash decreases, lowering current assets. If financed through a business credit line or lease, liabilities increase, impacting debt ratios like the debt-to-equity ratio and current ratio. A higher debt load can influence lending decisions and creditworthiness, making it important to assess whether financing aligns with broader financial goals.