Fixed Asset Accounting in Manufacturing: Depreciation Best Practices

Every piece of equipment on your factory floor tells a story. That CNC machine humming away in the corner represents far more than its purchase price. It represents years of production capacity, tax planning opportunities and balance sheet strategy. For manufacturing companies, fixed assets often comprise the largest portion of total assets, making proper accounting and depreciation practices essential to financial health and operational success.

Understanding Fixed Assets in Manufacturing Operations

Manufacturing companies depend heavily on physical assets to generate revenue. These assets include production machinery, computer equipment, vehicles, specialized tools and even the buildings that house your operations. Unlike service-based businesses that might operate with minimal equipment, manufacturers typically invest significant capital in tangible property that requires careful tracking and accounting.

Fixed assets are recorded at acquisition cost, which includes the purchase price plus all expenditures necessary to prepare the asset for its intended use. According to the IRS, costs such as freight, sales tax, transportation and installation should all be capitalized when determining an asset’s basis. This comprehensive approach ensures your records accurately reflect the true investment in each piece of equipment.

The importance of accurate fixed asset tracking extends beyond regulatory compliance. Your depreciation calculations affect taxable income, which directly impacts cash flow and tax planning. Recording incorrect asset values or useful lives can result in overpaying taxes in some years while creating unexpected liabilities in others. Manufacturing companies that establish clear capitalization policies and maintain detailed asset registers position themselves for better financial decision-making and audit readiness.

Establish Your Capitalization Policy

One of the first decisions in fixed asset accounting involves setting a capitalization threshold. This dollar amount determines whether a purchase gets recorded as an expense or added to your balance sheet as an asset. Businesses should adopt a capitalization policy that establishes this threshold clearly and applies it consistently across all acquisitions.

Your threshold should balance practical considerations with materiality. Setting it too low creates administrative burden from tracking numerous small items. Setting it too high might cause you to expense items that provide value over multiple years. Many manufacturing companies establish thresholds between $2,500 and $5,000, though your specific circumstances may warrant different amounts. Keep in mind that states with tangible personal property taxes, like Florida, may require you to track assets at lower thresholds for property tax reporting purposes, even if you expense them for federal income tax purposes. This means your internal tracking system may need to capture items below your federal capitalization threshold to ensure compliance with state requirements.

The components included in an asset’s recorded cost matter significantly. When you purchase equipment, the capitalized amount should include vendor invoiced cost less any discounts, plus shipping costs based on freight terms. For assets you construct internally, include materials, labor, overhead and applicable interest expense. Getting these calculations right from the start prevents adjustments later and ensures your depreciation deductions accurately reflect your investment.

Choose the Right Depreciation Method

For tax purposes, most manufacturing equipment must be depreciated using the Modified Accelerated Cost Recovery System, commonly known as MACRS. This system assigns assets to specific property classes based on their type and use, then applies predetermined depreciation percentages over the recovery period.

Manufacturing machinery typically falls into the five-year or seven-year property class. Computers and office equipment generally qualify as five-year property, while office furniture and most production machinery classify as seven-year property. Buildings have much longer recovery periods, with nonresidential real property depreciating over 39 years using the straight-line method.

However, a cost segregation study can identify building components that qualify for shorter recovery periods. Items like specialized electrical systems, flooring, lighting and certain fixtures may be reclassified from 39-year property to 5-year, 7-year or 15-year property. This reclassification accelerates depreciation deductions and improves cash flow, particularly when combined with bonus depreciation. For manufacturers with significant real estate investments, cost segregation often delivers substantial tax savings in the early years of building ownership.

MACRS offers two systems. The General Depreciation System uses accelerated methods that allow larger deductions in earlier years. The Alternative Depreciation System requires straight-line depreciation over longer periods and must be used in certain situations, including for some internationally used property and property used predominantly outside the United States. Understanding which system applies to your assets helps you plan for cash flow and tax obligations.

For financial reporting purposes, your depreciation methods may differ from tax methods. GAAP allows more flexibility in determining useful lives and depreciation approaches. Many manufacturers use straight-line depreciation for books while taking advantage of accelerated tax methods to defer tax payments. This difference creates book-tax timing differences that require tracking and eventual reversal.

Take Advantage of Tax Incentives

Manufacturing companies often have access to significant federal tax benefits related to equipment purchases. Section 179 allows businesses to expense the cost of qualifying property in the year it is placed in service, rather than depreciating it over time. For tax years beginning in 2025, the maximum Section 179 deduction is $2,500,000, with a phase-out beginning when total qualifying property placed in service exceeds $4,000,000.

Bonus depreciation provides another opportunity for accelerated cost recovery. Under recent legislation, 100% bonus depreciation is restored for certain qualified property acquired and placed in service after January 19, 2025, allowing businesses to deduct the full cost of eligible equipment in the first year (subject to applicable effective-date and election rules). This generally applies to new equipment and can also apply to used equipment that is new to you, if specific requirements are met.

These incentives require careful planning. The Section 179 deduction is limited by business taxable income, and unused amounts may carry forward. Bonus depreciation can create net operating losses, which are subject to separate utilization rules (including limitations on how much NOL can offset taxable income in later years).

Additionally, many states have their own Section 179 limits that differ from federal rules. Some states cap the deduction at amounts significantly lower than the federal maximum, while others do not conform to bonus depreciation at all. Businesses operating in multiple states or in states with non-conforming rules should factor these differences into their equipment acquisition decisions.

Maintain Accurate Records and Controls

Effective fixed asset management requires more than initial recording. You need systems to track assets throughout their useful lives, from acquisition through disposal. This includes physical locations, assigned departments, condition assessments and accumulated depreciation.

Regular physical inventories help ensure your records match reality. Manufacturing environments involve asset movements, retirements and modifications that may not always get communicated to accounting. Performing periodic counts and reconciliations catches discrepancies before they compound into larger problems.

Documentation requirements extend to supporting your depreciation calculations. The IRS requires records showing acquisition dates, costs, depreciation methods applied and any changes in asset use or condition. For listed property like vehicles, additional substantiation requirements apply regarding business versus personal use. Maintaining organized records throughout each asset’s life simplifies year-end reporting and prepares you for potential audits.

Partner With Experts Who Know Manufacturing

Proper fixed asset accounting requires attention to detail, understanding of complex regulations and strategic thinking about business goals. The decisions you make regarding capitalization, depreciation methods and tax elections affect your financial statements, tax obligations and cash flow for years to come.

At James Moore, our manufacturing team combines deep industry knowledge with accounting expertise to help you establish policies, maintain accurate records and take full advantage of available tax benefits. We understand the unique challenges manufacturers face and provide practical guidance tailored to your operations. Contact a James Moore professional to discuss how we can support your fixed asset accounting needs.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.