Generally accepted accounting principles (GAAP) do not allow you to deduct the cost of these items from your revenues in the year they are incurred. So, for example, let's say in some year, your company has booked $500,000 in revenues and incurred $300,000 in expenses. In addition, it made a major purchase of manufacturing machinery for $280,000. You are not allowed to subtract that $280,000 from the year's revenue less expenses and claim a loss of $80,000 (i.e., $500,000 minus $300,000 minus $280,000).

Instead, such a major purchase must be expensed over the period of its useful life; this annual expense is called depreciation. Although the Internal Revenue Service allows for many ways to spread that depreciation over the useful life, Offtoa assumes straight-line depreciation in all cases for the sake of simplicity; that is, we will assume that if machinery worth $280,000 has a useful life of, say, 7 years, it will be depreciated by exactly $40,000 each year for 7 years. As a result, in the year that the equipment is purchased, your company will subtract $40,000 of depreciation from the year's revenue less expenses and claim EBIT of $160,000 (i.e., $500,000 minus $300,000 minus $40,000). And for the next 6 years, your company will be able to subtract an additional $40,000 from its EBIT.

There exists one way to expense rather than capitalize fixed equipment and that is to lease the equipment instead of purchasing it. You can then expense the lease payments. However, be aware that if certain conditions are met by the lease, the lease must be treated as a capital lease, and the purchase will be treated (from an accounting point of view) as if you purchased the equipment outright. You can learn about these criteria by visiting http://pages.stern.nyu.edu/~adamodar/New_Home_Page/AccPrimer/lease.htm.

Related Question:

How do I add/change a major purchase (i.e., fixed asset) in Offtoa?