What Does Depreciation Mean for My Small Business?

At its core, depreciation is a pretty simple concept: Spreading your tax deduction for big-ticket business purchases over the item’s lifespan or useful life

But what does that look like in practice for small businesses?

Here's a quick guide!

What does depreciation mean for my small business?

Depreciation basics:

Here’s how it works: The IRS classifies the “life” of different types of business purchases into categories like auto/trucks and computers (5 year life), farm buildings (20 year life), land improvements (15 year life), office equipment (5 year life) or residential rental property (27.5 year life) to name a few.

When you make those business purchases, you can choose to take a full deduction that year (that’s a section 179 depreciation) or spread your deduction out.

Why would you want to depreciate a purchase?

Choosing to spread your deduction out over a few years can give businesses a little more stability if they know they can count on a deduction of a certain amount at the end of the year. 

For example, if a veterinarian purchases a $30,000 x-ray machine, that could be a huge deduction to take in just a single year. Choosing to spread that deduction out over the machine’s “lifespan” lets the veterinarian count on a deduction year after year.

What can be depreciated?

Until 2016, items over $500 were supposed to be depreciated. However, the IRS recently changed the threshold to $2,500.

That means if you make a business purchase over $2,500, it’s time to depreciate this large investment.

When is the right time to make big purchases?

Depreciation can play a major factor in when you should consider making big purchases for your business.

Oftentimes, big-ticket items that represent a significant investment into the business are end-of-the-year buys for small businesses in order to lower their net profit and save on their tax return.

Depreciation can play into this: Do you want to take a deduction all at once, or spread it out more slowly?

Is it the right time for you to make a big-ticket purchase?

Should you depreciate a recent investment over time or take a section 179 and take all your deduction at once? 

We can help you figure out your best options!

Come speak with an Accounting Plus tax specialist to weigh your options and find the smartest route for your business. Call today to set up a free consultation!

Additional resources: To learn more about section 179 visit the IRS webpage here: https://www.irs.gov/publications/p946/ch02.html.