Depreciation can be kind of scary for business owners. Then again, this is reasonable. The fact is that the rules can be extremely confusing and complicated.
So to help things out, let’s take a look at some basics.
First of all, depreciation is a way to expense the purchase of an asset that has a life of over one year. For example, if you buy a 3d printer, then you will depreciate it because it will last for a while.
Although, you do not have to figure out how long it will last. Instead, the IRS provides the depreciation terms for various types of assets, such as computers, real estate and so on.
There are also a myriad of ways you can expense an asset. In some cases, you can take a higher percentage in the early years or it could be equal amounts.
Example: Suppose you purchase a computer for $1,000. This will be booked as an asset on your balance sheet.
The IRS has a depreciation term for this asset at five years and you choose to expense the item in equal amounts. In other words, for the next five years, you will get to take an annual deduction of $200 ($1,000 divided by 5 years). This will not only be a write-off on your tax return but also on your income statement and balance sheet. The theory is that as you use the asset, the value will decline over time.
Then again, you might be able to deduct the $1,000 in the current tax year. This is because of Section 179, which allows you to expense up to $25,000 in asset purchases. For the most part, this is a common strategy for business owners.
There is also something else: bonus depreciation. With this, you can deduct up to 50% of your asset purchases (even after you include the Section 179 deductions). No doubt, this is popular for business owners. But unfortunately, this has been phased out for the 2014 tax year.