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