How Does Depreciation Affects Business Taxes?

When it comes to running a business, being diligent in your tax payments is, perhaps, the single most important issue there is, especially from a financial standpoint. In fact, taxes are so important that they can sometimes influence the business structure that people will choose for their business, just so that they can get a different tax scheme. Overall, when it comes to the issue of taxes, there’s one issue that’s quite important, even though it’s frequently misunderstood. We’re, of course, talking about the issue of tax depreciation, as well as the way in which it affects business taxes. Here are several things you need to know on this topic.

1.    What is depreciation?

Before we can dive in deep into this topic, we first need to discuss the issue of tax depreciation as a phenomenon. In order to do work, you need to spend some resources. Now, these resources aren’t always cash or cash-related. Sometimes, by working, you’re getting your equipment and premises (as well as other assets) worn out, which further diminishes their value. This is a standard case of asset depreciation. The way in which this interacts with taxes is fairly simple, as well. It makes no sense that you keep paying the same amount, year in and year out, for something that’s worth less and less. This is what it’s all about.

2.    The calculation

To further understand this issue, we need to briefly discuss the way in which depreciation is calculated. First, you need to set the original value of the asset. This is often misinterpreted by people who just go straight for the price when, in reality, you also need to include the cost of original fees, as well as transportation and setup (if there were such expenses). Next, you need to consider the issue of that asset’s useful life. The way in which this works is also fairly simple, seeing as how you need to consider the duration of time that it would take for the value of the asset in question to reach zero.

All of this, on the other hand, isn’t done by you but by someone appointed by the IRS. Keep in mind though, that in order to fully understand this, you need to talk consult professionals ahead of time and have everything well-prepared. Ideally, you would get some professional tax depreciation schedule quotes that you can act upon.

3.    Numerous options one can use

Now, even though tax depreciation may sound quite simple and straightforward, so far, the truth is that there are many hidden options that you can use. Instead of taking 10 percent of deduction each year, for an asset that has a useful life of 10 years, you can take a different route and write the entire value of the asset one time. The bottom line may be the same, yet, some businesses find this one-time help to be more significant in the survival and development of their company in these early stages. This is the so-called accelerated depreciation, which is one of the most common and most popular methods.

However, even the most common methods of depreciation aren’t always the same. You see, some assets lose value linearly, while others do so exponentially. There are four most common types of tax depreciation methods that you should be familiar with. We’re talking about straight-line, double declining balance, units of production and sum of years’ digits. All of the above-listed are quite self-explanatory and they’re there to explain the way in which your asset is losing its value over the course of time.

4.    Not all assets are eligible for depreciation

One last thing you need to understand is the fact that not all assets are eligible for depreciation. For instance, if we’re talking about the depreciation of property, there are several criteria that a property needs to fulfill in order to be depreciable. First of all, it needs to be the property that you own. Second, it should be used in your business or have an income-producing function. Other than this, it also needs to have a determinable useful life and it needs to last for more than a year. As we’ve already mentioned, depreciation works on a yearly basis, which is why it can’t apply to items with shorter useful life. As for the cost of the asset, there’s no such thing as a minimum amount for depreciating the expense.

In conclusion

You would be shocked to learn just how much tax return money goes unclaimed every year and just how many tax benefits go unused. To some, this may seem as unfortunate, yet, to an entrepreneur who knows just how much of a difference every single dollar makes, this is just outright devastating. Every dollar you fail to save this way, you’ll have to reclaim in some other way. Needless to say, other compromises usually tend to go less in your favor.