Purchasing fixed asset on account - Cash Basis Tax Payer?

[Hamacher]

Stupid question but... Cash basis tax payer purchases a computer from Best Buy ("6 months same as cash"). Hes paid for half the computer by the end of 2006. Should we start depreciating half the computer in 2006 and the other half in 2007 when its paid off.

Thanks in advance.

[JoshinNC]

It's no different than buying an auto on credit

Depreciation begins for the full purchase price in the year of purchase, accrual or cash.

[Hamacher]

I guess it would be more appropriatly set up as a loan? Its actually on a Best Buy credit card. It was my understanding that regular VISA or MASTERCARD payments are treated as cash but MERCHANT cards are treated as payables (i.e. not cash).

[Snaggletooth]

Not Entirely Cash Basis

Hammock, Cash Basis refers to the method of reporting revenue and expenses. You do not deduct (or depreciate) long-lived assets on the cash basis, any more than you would record Revenue as the proceeds of a Loan.

Some balance sheet items are still relevant with cash basis accounting. Among them are cash, marketable securities, goodwill, start-up costs, fixed assets and accumulated depreciation, Notes payable, and equity accounts, and even inventory sometimes. If preparing a schedule C, none of these items are asked for, but a corporation or partnership return does require a balance sheet and all the above items would be reportable on a cash basis balance sheet.

The most notable exceptions would be Trade Accounts Receivable and routine Accts Payable. These accounts record unreceived revenue and unpaid expenses and would therefore have no place under the cash basis.

For the computer you discussed, the entire value of the computer is depreciable in the year of purchase, and the offsetting account (were it recorded) would be a Loan payable to the seller. Conversely, there is no deduction in subsequent years when he pays off the computer.