Inventory vs Fixed Assets: The Equipment Mistake That Skews Your Profit
Buying new equipment feels like progress. New lifts, compressors, dyno upgrades, scanners. They make your shop more capable and more professional. But if that equipment isn’t tracked correctly in your books, it can quietly distort your margins, your taxes, and your cash flow.
This is one of the most common issues we see in performance shops and service businesses.
Inventory and Fixed Assets Are Not the Same
Inventory is what you buy to resell or install on customer jobs. Turbos, injectors, clutches, brake kits, tuning devices. These items flow directly into cost of goods sold and affect job margins.
Fixed assets are the equipment you use to run your shop long term. Lifts, welders, compressors, scanners, shop trucks, dynos. These don’t affect job margins the same way inventory does. They live on your balance sheet and impact your tax strategy instead.
Mixing these two categories is where financials start lying.
Expense vs Depreciate: The Simple Rule of Thumb
A common guideline is this:
If it lasts less than 12 months, expense it.
If it lasts longer than 12 months, it probably should be depreciated.
Many tax professionals also use a dollar threshold, often around $2,500. Items under that amount may be expensed. Items over it are typically capitalized and depreciated. This isn’t a hard rule and can change based on your tax strategy and CPA recommendations.
Examples:
$400 shop vac: expense it
$4,000 compressor: depreciate it
$12,000 dyno upgrade: depreciate it
Depreciation spreads the cost of equipment over the years you plan to use it instead of taking the full hit in one year.
Why Depreciation Creates Cleaner Books
When large purchases are expensed all at once, one year can look unprofitable while the next looks unusually strong. That kind of swing makes it harder to understand real performance.
Consistent depreciation leads to more predictable financials, clearer cash flow planning, and better long-term decision making.
Repairs vs Upgrades Matter
Not every equipment cost should be depreciated.
Repairs keep something running and are usually expensed
Upgrades improve capability and are usually depreciated
Replacing a belt is an expense. Adding an attachment that expands what the machine can do is an upgrade. Fixing a dyno sensor is an expense. Increasing horsepower range is an upgrade.
Why This Actually Matters
When equipment is tracked correctly, you see:
Accurate margins
Cleaner financial statements
Better tax deductions
Smarter upgrade and purchasing decisions
When it’s tracked wrong, you get confusion, inconsistent profit, missed deductions, and the classic question: “Where did all the money go?”
Good equipment tracking isn’t boring bookkeeping. It’s a strategic step toward growing profit on purpose.
If you want help cleaning up your equipment list or figuring out what belongs where, that’s exactly what we do at A&L.