Understanding Depreciation: What Business Assets Can Be Depreciated?

If you’re a business owner and you’re wondering what can be depreciated, well, you can depreciate almost any type of tangible property including equipment vehicles, machinery, buildings, and furniture. You may have business assets that are depreciable that have a lifespan and can be deemed as a business expense. Also, according to the IRS, you may depreciate specific intangible property like computer software, copyrights, and patents.

In this article, we’ll help you learn about what depreciation is and what assets can be depreciated. 

 

Understanding Depreciation in Accounting Terms 

Depreciation is a type of accounting method that a business applies to account for the diminishing value of its assets. By issuing the cost of an asset you bought over the period of time when it’s likely to be in use, businesses can reduce a smaller amount of the cost over a few years of one huge deduction in the year it was purchased. 

The objective of this is to complement the cost of the asses to the revenues accumulated from using the asset. In addition, writing off assets provides you with the opportunity to lower the tax bills. 

 

What is a Depreciable Business Asset? 

Gray Wooden Computer Cubicles Inside Room

By definition, a depreciable business asset is a type of business expense that pertains to items with set lifespans. These assets deteriorate over time, and businesses can continue to acquire tax write-offs during the assets’ lifespans. 

The IRS or Internal Revenue Service should have five specific conditions to guide businesses in identifying which of their assets are depreciable. A depreciable property or asset must:  

  • be utilized in a business or have an income-producing function
  • be something in a business owns 
  • have a useful lifespan that can be calculated 
  • be fairly expected to last at least one year 
  • not be covered on the IRS list of property that is not qualified for depreciation 

What Business Asset Cannot Be Depreciated?

Take note that businesses can’t depreciate all their assets. Low-cost items that come with a short lifespan are recorded as business expenses. You may write off these costs in the year they were sustained. So which assets do not depreciate? You are not allowed to depreciate property for personal use and assets carried for investment. Here are some examples of non-depreciable assets: 

  • Current assets like money on hand, receivables 
  • Land 
  • Leased property 
  • Personal property 
  • Investments including stocks and bonds
  • Collectables like art, coins, and memorabilia 

How Do Depreciable Business Assets Work? 

You may start depreciating an asset when it’s used in service. It simply means that the asset is “available and prepared to be used.” The asset doesn’t necessarily have to be in use, but it shouldn’t be sitting in an unopened box too. For instance, if your computer is the asset, and it’s placed into service, after you set it up, you must be able to turn it on and make sure that it works. Once you’re done setting it up, it’s placed in service, whether or not you’re using it regularly after setting it up. 

Depreciation is simply an accounting transaction? Why? When the time the assets is in use, an accounting transaction takes place in which a specific amount of the expense of the assets is placed into a depreciation expense account, and the start cost of the asset is lessened by the same amount. At the end of the year, the collected depreciation for the year is detailed on the business financial statements, together with the initial cost of all the goods being depreciated. 

Furthermore, you must take note that you can’t do depreciation on your personal taxes because depreciation is a form of a business expense. For example, you have your own property with both business and personal uses, such as a car, you can only depreciate it in corresponding to how often it’s used for business intentions.

 

How to Calculate Depreciable Assets 

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There are different ways to depreciate an asset. You can use the straight-line depreciation method where the business charges a similar depreciation expense per accounting period. This is the asset cost minus the residual value, divided by the number of functioning periods. 

According to the IRS, for almost all properties out there, The Modified Accelerated Cost Recovery System (MACRS) is the most appropriate depreciation method. It’s a method of depreciation that accepts a larger tax deduction in the early years of an asset and less in succeeding years. Here is the formula in calculating the MACRS Depreciations: 

  • The cost basis of the asses X Depreciation rate 

On the other hand, the other methods for the depreciation calculation are the double-declining balance method and the unit of production method. It’s also important to have a depreciation schedule that charts the dropping in value of an asset over the time you’ve designated as its useful life, utilizing the accounting method you’ve decided to use. The purpose behind having a depreciation schedule is to provide you with the ability to track what you’ve already deducted and remain on top of the process. 

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