Want to Preserve Your Assets? Explaining Depreciation for Tax Purposes

Your small business will be responsible for depreciation for tax purposes each year. Find out here what depreciation is and how to use it to your benefit.

 

The idea of depreciation is mostly negative in the eyes of most people. The misunderstood thing is, depreciation can actually work to your benefit when it comes to taxes.

Using depreciation for tax purposes can save your business a lot of money in the long run, and you should take note. The benefit that you receive will depend on the value of your assets and the tax bracket of your business. That being said, any money is good money.

When you’re starting out, you need to maximize every opportunity you have to save money. Use this guide to chip away at your goals of running a successful business.

Using Depreciation for Tax Purposes

The value of business purchases will diminish over time. The process of an asset’s value diminishing is called depreciation.

We typically see this as a net loss because our items are being stripped of the value they originally had. As we’ve discussed, you can capitalize on depreciation by writing it off on your taxes.

The process of doing this can be tricky, though, and the rate of depreciation depends not on the asset itself, but the category that it falls into.

Forms of Depreciation

The best-known form of depreciation comes when a physical asset is devalued over time due to wear and tear or use. This wear and tear can be written off as a business expense when you fill out your taxes.

It’s lesser known that a business can write off depreciation on property that’s intangible, such as copyrights and patents. The category that your asset falls into determines the rate at which it depreciates.

Categories of Depreciation

When it comes to physical property, there are three general categories that items fall into. You should research your specific items, but we’ll give you a general idea of the items that tend to go in each.

The categories below cover the amount of time that it takes the item to depreciate. We’ll cover how to calculate your savings after we list the categories.

Things like heavy machinery, some livestock, and tractors have a depreciation period of three years. Office materials such as computers, printers, scanners, and vehicles have a depreciation period of five years. Furniture, kitchen appliances, and most non-categorized items fall into a depreciation period of seven years.

Your real estate has a much longer period to depreciate. Rental properties are generally set to devalue over roughly 27 years. Commercial buildings and owned property have a period of almost 40 years.

It can be difficult to correctly assess your assets. When you’re doing your first round of depreciation write-offs, it may be wise to hire a quantity surveyor.

Making Calculations

There’s a pretty straightforward way of calculating your possible yearly deduction on an asset. Take the value of the item, divide by the number of years it takes to depreciate and deduct that number from your taxes.

The only irregularity comes in the first year. You’re only entitled to half that number for the first year. So, say you bought a computer that is set to depreciate over five years.

The computer costs 1,000 dollars. The first year’s deduction is found by taking 1,000 divided by 5, divided by 2. Every year after that, the total would simply be 1,000 divided by 5.

It’s that simple, and your business can save thousands of dollars a year by factoring for depreciation. Once you get a grasp on your assets and how they depreciate, you can start considering different methods of saving.

Maximize Your Business Potential

Using depreciation for tax purposes is a great way to save money for your business. The thing is, the world is jam-packed with methods to grow a successful startup in today’s market.

If you’re interested in finding ways to maximize your business’ potential, we have the information you need.