Depreciation and Taxes

Updated: Jan 31

White office building with blue tainted windows

When it comes to business expenses, you can't necessarily deduct the entire purchase price in the year acquired. You may be required to depreciate assets or capital improvements. This even applies to horses so stay tuned for next week's post if you are in the equestrian industry.

So what is depreciation?

Depreciation is the recovery of the cost of the property over a number of years rather than as a one-time write-off. This means you may deduct a portion of the cost each year until you fully recover its cost. The IRS provides guidance on how to depreciate property, including over how many years the cost must be spread, based on the type of asset. Some examples of property that you must depreciate include machinery, equipment, buildings, vehicles, furniture, and rental property. Land is never depreciable nor is personal property.

Three yellow tractors

Items below a certain value may be expensed in the year inquired rather than depreciated if the taxpayer makes a safe harbor election with their return. The current safe harbor value is $2,500.

The IRS also provides special depreciation allowances that may allow you to deduct 50% or 100% of the cost of the asset in the year in which it was acquired.

Understanding depreciation is an important aspect of business ownership. As a result of depreciation, your cash flow may not match your taxable income and it is key to plan for this difference so there are no surprises at tax time. In addition, you must consider the adjusted basis of your property when it is sold (the cost less depreciation) when determining if there was a gain or loss on the sale of the property.

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