Depreciable business assets are properties or things that have specified lifespan and will break down over time. Plus, these valuables are generally considered as business expenses. These valuables can be depreciated on a business’s tax, meaning that a company’s expense’s tax benefits get spread out over several years, increasing income.
From discussing what properties are considered depreciable, different depreciation methods to understanding how it can affect your business—here’s everything you need to know about it.
What Assets Are Depreciable
Depreciable assets are business expenses that pertain to properties and items with set lifespans. These can break down over time, and companies can continue to receive tax benefits throughout an assets’ lifespan, making it a crucial business strategy to implement in business operations.
The Internal Revenue Service (IRS) is the organization responsible for all things taxes in the United States and has requirements to help businesses know what assets are depreciable.
These requirements are:
- Properties should be something the business fully owns
- Businesses should use the items for business-related purposes or income-producing capacities
- Have a ‘useful’ lifespan that companies can calculate
- The property or object should be able to last for one year
In other words, what the IRS considers as depreciable are income-producing properties that you own and maintain. For instance, if you regularly have your ducts and HVACs cleaned by experts and use them for more than a year. These will usually decline in value over time, making the entire unit depreciable.
Besides that, depreciable properties may also include machines, company cars, office buildings, buildings that you rent or for income, and other equipment. Additionally, keep in mind that depreciable properties can be tangible like computers and other technology and intangible—including copyrights, software, and patents.
Remember that you can’t claim depreciation on personal taxes since it’s technically a business expense. If you own any property that you use for business and personal uses, such as a car, you can depreciate it depending on how often you use it for business purposes.
What Can’t You Depreciate?
You can’t depreciate properties that you use personally, for inventory, or assets you’ve held for investment purposes as these assets don’t lose their value over time—or you’re not currently using them for producing income.
- Property or land
- Collectibles such as artwork, commemorative coins, and other memorabilia
- Properties placed in service but used for less than a year
- Investments such as stocks
- Unoccupied buildings
- Personal items such as clothes, your home, and car
Common Depreciation Methods
If you’re looking to take business depreciation into practice, the most common and risk-free methods you can try are straight line and accelerated. Straight-line depreciation can generate ongoing expenses every year while accelerated depreciation front-loads costs in the early years. Accelerated depreciation can help your business pay less for taxes through your reported net profit will be significantly less in your initial years of operations.
Whatever method you choose, remember that depreciable items or property need to have the same costs, life span, and salvage value until the end
How Does Depreciation Affect Your Business?
Depreciation can reduce the taxes your business needs to pay via deductions that you can gradually make by keeping track of the decrease in your assets’ value. Your organization’s depreciation expenses can reduce the amount of taxes you need to pay by lowering the amount of profit you make on which your taxes are based. So, the bigger the depreciation expense—the lower your taxable profits, the higher your income.
Knowing the things you can and can’t depreciate can help your business avoid paying for high front-loaded costs and enjoy optimal financial results—helping you earn more by ‘losing’ more depreciated assets.