Depreciation and why it is important to your business
Depreciation is the reduction in the value of an asset due to usage, passage of time, wear and tear, depletion or other such factors. When you purchase an asset for your business and place it in service you are allowed to write off a portion of the purchase price each year as depreciation expense.
For example, business furniture is most often depreciated over seven years so if you purchase a $700 desk on January 1st of 2008 you may take $100 worth of depreciation in 2008 and then an additional $100 per year for the next six years. At the end of seven years you have taken the value of the asset to zero in this example.
Depreciation is nothing more than an estimate that is made in accordance with various guidelines.
Various methods of accelerated depreciation are available to allow business owners to depreciate their assets earlier; accelerated depreciation rules are often put into place by our elected officials in order to “encourage” business owners to spend money on equipment which in turn increases spending.
Depreciation is an expense that will lower your companies net income. The lower your net income the less you will pay in income taxes. Depreciation is something that you and your accountant must consider carefully when analyzing your tax situation. It is not always best to take accelerated depreciation!
Mike Sylvester, CPA/ABV