What Can Be Depreciated in Business? Depreciation Decoded

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.

What Is 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.

What Is a Depreciable Asset?

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.

What Can Be Depreciated in Business and What Can’t?

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.

Which Business Assets Can’t Be Depreciated?

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:

• Real property, such as land,
• Current assets such as cash,
• Stocks and bonds,
• Personal real estate,
• Personal belongings,
• Collectible pieces such as art.

What Can Be Depreciated in Business?

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:

• Different types of vehicles (special rules apply for trucks, vans, and passenger cars)
• Office buildings, factories, any commercial property,
• Manufacturing machines,
• Equipment such as PCs,
• A fixed asset that is considered a part of the building, such as lighting,
• Qualified property that’s rented out for income.

What About Intangible Assets?

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.

Why Does Asset Depreciation Happen?

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.

What Is Bonus Depreciation Deduction?

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.

How to Calculate Depreciable Assets?

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:

• Straight line depreciation – In this depreciation method, you’ll charge the same depreciation expense in every accounting period. The calculation goes like this: you take away the residual value of the actual cost of the asset, and then you divide it by the number of functional years.
• Modified accelerated depreciation – Also known as MACRS, is basic and the most frequently used depreciation method since it is suitable for the majority of properties. With this method, the tax deduction will be bigger in the first few years than in the later ones. To calculate it, you have to multiply asset cost by the depreciation rate.
• Double declining depreciation method – In certain cases, you can accelerate depreciation deductions with a 150% or 200% declining balance. To calculate it, you first do the straight line and then double it if you want to go for 200%. If you want 150%, then you multiply it by 1.5.
• The unit of production – When using this method, it is not so much about the time passed but about the asset’s usage and capacity. Meaning that in the year you use this asset the most, depreciation would be the highest. You calculate it by dividing the asset’s cost (minus salvage value) by the number of units the asset should produce during its life span and then dividing it by the number of units actually produced in the current year.

Don’t Forget to Keep All the Records

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.