Depreciable business assets are assets that have a lifespan and can be considered a business expense. These assets can be depreciated on a business's taxes, which means that the tax benefits of the business expense are spread out over multiple years.
Learn the key terms that apply to depreciable business assets, and how to tell them from assets that can't be depreciated.
What Are Depreciable Business Assets?
A depreciable business asset is a form of business expense that applies to items with set lifespans. These assets break down over time, and businesses can continue to receive tax write-offs throughout the assets' lifespans.
Depreciable business assets include most forms of property, including buildings, machinery, vehicles, furniture, and computers. You can also depreciate some forms of intangible property like patents, copyrights, and computer software.
The Internal Revenue Service (IRS) has five specific requirements to help businesses determine which of their assets are depreciable. Depreciable property must:
- Be something a business owns
- Be used in a business or income-producing capacity
- Have a useful lifespan that can be calculated
- Reasonably be expected to last at least one year
- Not be included on the IRS list of property that does not qualify for depreciation
You can't claim depreciation on your personal taxes because depreciation is a form of a business expense. If you own property with both business and personal uses, like a car, you can only depreciate it in proportion to how often it is used for business purposes.
How Do Depreciable Business Assets Work?
You begin depreciating an asset when it is placed into service. This means that the asset is "ready and available for use." The asset doesn't have to be in use, but it can't be sitting in an unopened box, either. For example, if the asset is a computer, it is "placed into service" once you set it up and turn it on to make sure it works. After you set it up, it's placed in service, whether or not you regularly use it after setting it up.
Depreciation is basically an accounting transaction. During the time the asset is in use, an accounting transaction takes place in which a certain amount of the cost of the asset is put into a depreciation expense account, and the initial cost of the asset is reduced by the same amount. At the end of the year, accumulated depreciation for the year is shown on the business financial statements, along with the initial cost of all the property being depreciated.
You stop depreciating a business asset when either one of two events occur. First, you could sell that asset. Second, that asset could reach the end of its useful life—then it is no longer is being depreciated.
The length of time that an asset has "useful life" depends on its class for depreciation purposes. The IRS sets these limits. Some common ones include a three-year lifespan for tractors and livestock, a seven-year lifespan for office furniture, and a 39-year lifespan for commercial buildings.
What Assets Cannot Be Depreciated?
Some assets cannot be depreciated at all. The most common reason for an asset to not qualify for depreciation is that the asset doesn't truly depreciate.
For example, land can't be depreciated because it is never "used up" and it doesn't inherently lose value. Soil can lose quality, and you may be able to depreciate some costs associated with land preparation. Buildings wear down, and you can depreciate the buildings. However, land in and of itself is not depreciable.
You also can't depreciate assets that are purchased and disposed of in the same year, otherwise known as "current assets." Current assets include certain supplies, prepaid insurance, and accounts receivable (amounts owed to your business).
As a final example, you can't depreciate cash holdings. While buying power changes over time as the result of inflation and deflation, cash itself maintains the same value. A $20 bill will always be worth $20, even when $20 doesn't buy as much as it used to.
- Depreciable business assets are assets that wear out over time.
- Depreciation is essentially an accounting transaction that spreads out the tax benefits of a business expense over the lifetime of the asset purchased.
- Business assets that deteriorate over time but last at least one year usually qualify for depreciation.
- Personal assets cannot be depreciated.