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Every business owner, especially the startup ones must try looking to acquire every single business they have the rights to. And one of them that you may not be aware of is depreciation—the recurring diminish in the value of the property, which can be utilized to counteract income from your business. Most business expenses are actually deductible since they are a common and essential business expense. You invest for an item in the present year and you obtain a deduction in that year. 

 

Depreciation may result in valuable income tax deductions that help small business owners retain thousands of dollars each year. However, identifying how to exactly calculate and be entitled to the deduction is where things can be more confusing. 

 

Understanding Depreciation 

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So, if you are familiar with how depreciation works, it’s very simple—it gives small business owners an opportunity to lessen the value of an asset over time, because of its life span, wear and tear, or deterioration. It’s a yearly income tax deduction that’s considered as an expense on an income statement; you may claim a depreciation. Aside from that, depreciation is also the method by which a business deducts the value of a capital asset. 

 

Depreciable Assets 

 

The assets that are usually depreciable are computers, equipment, buildings, machinery, equipment, office furniture, and work vehicles. Aside from that, you may also be able to write off the intangible property like copyrights or patents, according to the IRS. However, properties that can’t be depreciated including land (will never wear and tear), lease property (you don’t own it), or inventory (it’s intended for sale). 

 

Generally, depreciation is held against buildings possed by the equipment, business, and even minor items such as cellphones and computers. Tax depreciation is utilized to reduce your tax burden because you are decreasing your total taxable income. However, it’s crucial that you get to understand that depreciation won’t have any impact on your company’s cash flow or its original cash balance since it’s a non-cash expense. 

 

Assets That Can’t Be Depreciated

 

You might be curious about the things you can’t depreciate. The properties that can’t be depreciated are the ones for inventory, personal use, or assets utilized for investment purposes. The assets that can’t be depreciated are the things that don’t lose their value as time passes by or that can produce or make income. Here are some of the examples:

 

  • Investments (stocks and bonds) 
  • Collectables (coins, art, and memorabilia) 
  • Buildings (not actively renting for profit) 
  • Land 
  • Properties that are put in service and used for less than one year 
  • Properties you use personally (house, car, and clothing)

 

It’s important to take note that when it comes to depreciation, the cost basis of your asset must not only include the purchase price, additional costs also like freight charges, sales taxes, and testing and installation fees. 

 

Benefits of Depreciation to Business 

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1. Accurately report assets 

 

Depreciation expense can support companies to properly report assets at their net book value. Companies from the start record their fixed assets at their original purchase prices. But the asset value decreases over time as the outcome of asset uses that possibly cause an asset’s wear and tear. Therefore, companies should adjust the value of an asset to its net remaining value. If you don’t know what an asset’s net book value is, it’s the original purchase cost deducted by the asset’s collected depreciation, the entire depreciation expense from all earlier periods. 

 

2. Match With Revenue 

 

One of the benefits of depreciation expense is that it helps businesses to equally state the amount of expense sustained as a result of using an asset throughout an accounting period to accurately match with the revenue that the asset use aims to bring about in a similar period. If you don’t correctly charge an asset’s cost of the purchase to depreciation expense, companies may overstate or understate total expenses and therefore misstate revenues, reporting wrong and confusing financial information. 

 

3. Recovering the purchase cost of an asset 

 

Depreciation expense gives an opportunity for recuperating the purchase cost of an asset. Not like asset expensing by which businesses can recoup the cost of an asset instantly, using asset depreciation, companies can reclaim overall asset cost over the useful life of the asset during periodic depreciation cost, the chunk of revenue may have been misused for other intentions. 

 

4. Generate tax savings 

 

Depreciation expense is an advantage for businesses to generate tax savings. Tax rules let depreciation expense be utilized as a tax deduction as opposed to revenue coming up at taxable income. Take note that the higher the depreciation cost, the lower the taxable profit, and therefore, the more you can have tax savings. 

If you want to read more about tax depreciation and how to calculate it, make sure you click here.

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