Deprecation can be a huge tax savings for businesses. However, many small businesses choose to ignore their depreciation because they do not understand it or believe that they cannot take such a deduction. The truth is, most business equipment is eligible for a tax deduction as it depreciates.
Understanding the basics about small business deprecations can save you thousands of dollars in some cases. The tax professionals at The Goldberg Tax Practice can also give you more detailed information about how depreciation can affect your individual business.
Depreciation allows a taxpayer to recover the cost of certain types of property over time through a tax deduction. An annual amount is allowed based on the wear and tear the property experiences on a yearly basis.
Virtually every property loses its value as it is used. Depreciation is a way for businesses to take a monetary deduction for the gradual loss of value in their property as they use it.
Most tangible property that has a useful life of more than one year can be depreciated. Even improvements to property can be depreciated. Examples include:
· Equipment
· Vehicles
· Furniture
· Buildings
Some intangible property can also be depreciated including:
· Copyrights
· Patents
· Computer software
Only property that the business owns can be depreciated. Leased property is not subject to deprecation.
The property must also be used for business purposes. If the property is used partially for business purposes and partially for personal use, then only that portion of the property that is used for business can be depreciated.
For example, if you use a vehicle for work and for personal use, you should track the amount of miles that you use for both purposes. Then, the portion of business miles to total miles is the percentage of the depreciation that you can take. Tracking this information is important to get the full value of your depreciation deduction.
Land can never be depreciated, but certain alterations to land can be depreciated. For example, farming operations can depreciate installed drainage tile. Your Alexandria tax preparer can provide specific information about your tax situation so you can take full advantage of your depreciation options.
Other items that cannot be depreciated include:
· Any property that is bought and used in the same year
· Equipment that is used to build capital improvements
· Certain intangible property types such as agreements or contracts
Most small businesses will use the straight-line depreciation method. That means that each year has the same value in terms of diminution in the property’s value.
First, you must determine what the cost was of the property—the cost serves as the property’s “basis.”
Second, you must determine what the property’s useful life is. A property’s useful life is an estimate of how long you will use a piece of equipment or other property in your business. Things that affect the useful life include:
· Whether the property was new when it was acquired
· Your business’s repair policy
· Whether the property will be affected by any environmental conditions
· Prohibitory laws
· Technological improvements
Third, you must also determine the salvage value of the property. This is any remaining value that the property will have after it has been used for its full useful life. Often, the salvage value is zero.
Using the straight-line method requires you to subtract the salvage value from the cost (usually the basis). This amount is then divided by the number of useful years. If the property was used for the full year, then you can deduct the full amount of total. Otherwise, you will also need to adjust for the portion of the year that you actually used the property.
Even using the straight-line method, one of the simplest depreciation methods, can be very complicated if you need to adjust your basis for any reason. Other methods are even more complex. Using an experienced tax preparer will be extremely helpful in making sure that these calculations are correct.
Certain property is considered “listed property,” and it must be depreciated using a special method. They have unique rules and limitations as well. Listed property includes:
· Passenger automobiles
· Any property used for transportation
· Property used for recreational or entertainment purposes
· Computers in some limited situations
Depreciation is complicated, but that should not keep you from taking advantage of the benefits that it offers for small businesses. Speaking with an experienced Alexandria, VA tax preparer can be a great help. Contact The Goldberg Tax Practice by clicking on our profile below or using the Contact button.
