Depreciation is one thing that many business owners often overlook, but you shouldn’t because there are many benefits to it. Now, if you’re wondering what can be depreciated in business, the answer is – almost everything. That’s why you should pay close attention to the following lines to become the master of depreciation.
First things first, let’s discuss depreciation. The term basically stands for reduction of value, which happens to most purchased things from the moment you buy them. Over time, their value decreases, which is why asset depreciation is basically a deduction that allows a business to write off the costs and save on taxes, regardless if the actual value of the asset increases or decreases over time.
Annual allowances for depreciation are typically spread over the estimated life of the property, which is why many small business owners forget to take advantage of deductions after the year of acquisition.
A depreciating asset can be pretty much any asset purchased for the purpose of generating income, and that can be used for more than a year. Its book value gradually decreases over time, but the duration of that time period depends on the asset’s classification.
Here is the interesting part. You can’t actually depreciate each and every business asset. For example, certain items that are purchased for a business purpose but are not expensive and have a short life span usually don’t fall under this category and are classified simply as a business expense. Those can be typical office supplies and stationery, but not a printer or a copy machine that can be used over a longer period.
Not all fixed assets can be depreciable because they don’t lose value over the course of time. Also, personal property that’s not meant for business use can’t be depreciated, as well as assets kept for investing. Other frequently mentioned non-depreciable assets are:
This is where you want to grab a pen and paper and start taking notes because every tangible asset from this list is a good candidate for depreciation deduction. Here are some of the most frequent assets that can be depreciated in business:
There are two main types of assets, intangible and tangible ones. Tangible property can be physical things owned by your business. But intangible assets are not physical and can be anything from trademarks and copyrights to patents. However, they too can be depreciated, depending on to which category they belong.
Section 179 intangibles such as a customer or a price list, operating systems, formulas, designs, trademarks, etc., that were bought by a business and deducted ratably in no less than fifteen years can be deducted. When it comes to intangibles that don’t fall under Section 179, deduction for them, the straight line depreciation method is used.
Most fixed assets have a certain life span, and they are not cheap or easy to replace. That is why small businesses should keep depreciation in mind. When the time comes to replace a capital asset, a business will have some money in stock to purchase new ones. Depreciation doesn’t affect cash flow. It just reduces taxes.
Bonus depreciation is a perk that you can use in addition to Section 179 deduction. However, it doesn’t mean that it is an additional bonus deduction. It is a way to write off the total cost of an asset during the first year of purchase.
There are a few ways you can do this to figure out what is the best depreciation formula for your business. Here are the examples:
Depreciation is not, and it doesn’t have to be complicated. Especially if you rely on an experienced accountant to take care of this, you just need to make records of every purchase, and your accountant will guide you through the entire process.