Most business owners understand the importance of deducting their business expenses on their tax returns. The cost of running a business can be quite high, and deducting expenses that are essential to business operation makes it possible for businesses to greatly reduce their tax bills. But not all business expenses can be claimed in the year that you pay for them. Some must be depreciated over several years.
This blog will give you a quick look at which types of assets need to be depreciated over time, as well as giving you a general idea of how depreciation applies to your business tax return. If you need assistance with calculating your depreciation deduction, contact Biesinger & Kofford CPAs to speak to a business tax professional in Provo.
What Assets Should Be Depreciated?
There are many business expenses for which you can deduct the cost upfront. This would include the cost of short-term-use items, like office supplies, as well as subscription-based costs like cellphone plans and SaaS expenses. Long-term business assets, such as office equipment, must be depreciated over the years. There are three categories of depreciable business assets:
- Three-year property includes tractors, livestock, and some manufacturing tools.
- Five-year property includes office equipment (such as copiers, printers, and computers), cars, light trucks, and certain assets used in construction.
- Seven-year property includes office furniture, appliances, and any asset not included in previous categories.
Real estate can also be depreciated, but over a longer period of time. Residential rental properties are depreciable over a period of 27.5 years, and commercial buildings can be depreciated over the course of 39 years. Improvements on you property, like landscaping and sidewalks, are also depreciable over 10, 15, or 20 years, depending on the asset. However, since the land itself does not wear out, it is not depreciable; only the assets on the land can be depreciated. If any of the above assets cost less than $500, it can typically be expensed in the year of purchase rather than needing to be depreciated.
How Depreciation Applies to Your Taxes
Depreciation is a concept that most people easily grasp in terms of their personal property. When you purchase something like a new car, it begins to lose value as soon as you drive it off the lot, and continues to depreciate over the years. The same concept applies to the business assets above. But how does this apply to your taxes.
The IRS recognizes that the lost value of your business assets is a cost for your business, and so you can deduct the gradual depreciation of these assets year by year. Of course, deducting the correct amount each year requires very specific calculations, and you should work with a tax professional to ensure you’re claiming the right amount and getting the maximum benefit. You can continue to claim a deduction on the depreciation until you retire the asset from use, or until you’ve reclaimed the total cost.
It’s important to note that, if you use an asset for both personal and business purposes, you can only claim a portion of the asset’s cost. For example, if you purchased a laptop and it is used for business purposes only 50% of the time, you can only depreciate 50% of the total cost.
For further help with deducting your business expenses and claiming depreciation on your assets, contact Biesinger & Kofford CPAs and speak to a business tax professional in Provo.