BATS Xpress, LLC

Did you know depreciation can be a good thing? When people think of this concept, they often associate it with a loss of some sort. However, with the right guidance from an experienced accountant, depreciation can help small businesses achieve financial gains in the long run. 

The key to using depreciation for benefit is to understand what exactly it means.

What is Depreciation?

The definition of depreciation is, “a reduction in the value of an asset with the passage of time”. 

The word is most frequently used in situations like buying a new vehicle. The moment you drive a new car off a dealership lot, it instantly becomes worth less money on the market. In this instance, depreciation would not be a benefit to the car owner.

When it comes to using depreciation in a business setting, the meaning behind the word shifts and becomes much more appealing to owners. 

How Depreciation Can Benefit You

Depreciation can be a valuable tool when running a small business. Tax laws allow business owners a deduct a portion, if not all, of the cost of qualifying assets from their taxable income. That means, instead of losing money, depreciation can be a financial benefit. 

This is a process over time. When a company spends money on an asset, they don’t necessarily claim the full cost right away. Instead, the business would depreciate the asset over time and eventually hope to be able to claim the full cost. Think of it like claiming expenses, except you are only claiming the depreciation amount.

There are two primary methods of using depreciation: Accelerated and Straight-line. 

Straight-line – Depreciate the asset an equal amount each year over its useful life.

Accelerated – Take larger depreciation deductions in the first few years, then smaller deductions later on.

What types of assets can be used for such a write-off? Actually, quite a few if you know how to properly use this tax advantage.

Qualifying Assets:

• Buildings

• Vehicles

• Equipment

• Machinery

• Intangibles

Along with these assets, a small business is also allowed to fully deduct “ordinary or necessary” costs in relation to the property used to keep a business going. That includes repairs and maintenance, as long as it is routine.

Maintenance Deductions:

• Roof upkeep

• Sealing cracks/leaks

• Repairing broken windows

• Changing oil, or other fluids in equipment

• Exterior or interior paint

All of these deductions can vary depending on the business and asset uses. There are a few things you cannot use for depreciation, including land, inventory, and leased property.

You should also keep track of any assets sold within the tax year. If you received less money than its depreciated value, you can claim the difference as a loss and deduct that from your tax bill, as well.

This is why working with a tax expert is important for small businesses. Missing out on a qualifying deduction, or relying on something that won’t count, could mean missing out on a lot of tax savings.

Who Can Use Depreciation?

When it comes to using depreciation for a small business, there are a number of industries this applies to. Some include IT, restaurants, construction, real estate, veterinarians and many more.

If you use computers, or vehicles, or machinery to keep your business running, chances are you are qualified for this useful tax break. You just need to be vigilant about handling all the paperwork properly.

For any business owner, it is very important to keep records of any asset that may be used for a depreciation write-off. Things like proof of purchase, depreciation claims, adjusted tax value of each asset, and a compliant invoice all need to be kept and recorded. 

Ways a Tax Pro Can Help

While this information is a great start to understanding the many ways depreciation can benefit your small business, there are several nuances to consider within the laws. Understanding these different tax codes can be a benefit or detriment to a company trying to navigate it all alone.

Using a professional accountant can create a more secure foundation for your business’s tax returns. Figuring out which assets can be used by different businesses, how often to keep record of depreciation, which forms you need to file ahead of time, and list goes on.

There are so many opportunities to help your small business stay financially secure, but you may not be aware of them all or have the time to keep up with the process. Hiring a qualified CPA to handle this work for you can help your small business become more financially savvy and successful for the future. 

Have questions about depreciation? Give your team at BATS Xpress a call today to discuss!