What Are Depreciable Assets for a Business?
What you buy for your business can be deducted on your taxes
Why Are Depreciable Assets Important?
Anything you buy for business use can be deducted as an expense on your business tax return. Some assets (things of value) you buy may be deducted immediately (these are current assets), while other assets have a long-term life and these assets can be deducted over the years of their life. For example, if you buy a car for your business, you can deduct the cost of the car over a specific number of years. This is depreciation, and it's a benefit to you for tax purposes to be able to take these deductions.
The IRS uses the term "depreciable property," which is basically the same thing as depreciable assets, so we'll use the term depreciable property in this discussion.
What Assets Can Be Depreciated?
You can depreciate most types of tangible property (property you can see and touch), including:
- Furniture and fixtures
You can also depreciate most intangible property, (property that has no form) including:
- Computer software.
The IRS has specific requirements for property to be able to be depreciated:
- It must be property you own.
- It must be used in your business or income-producing activity.
- It must have a determinable useful life (calculated through tables)
- It must be expected to last more than one year.
What Assets Cannot Be Depreciated?
Land: Land can't be depreciated because it isn't used up or worn out. It doesn't lose its value. But you can depreciate some land preparation costs.
Current assets: You can't depreciate assets that are purchased and disposed of in the same year. Current assets include supplies, prepaid insurance and other pre-paids (amounts you pay for ahead of time, like insurance), and accounts receivable (amounts owed to your business).
Cash: Cash is the amount in your business checking account. Its value stays the same and it is not a long-term asset, so it can't be depreciated.
Depreciable assets include equipment and other tangible assets. Supplies cannot be depreciated because they are considered to be used within a single year and they are expensed during that year. Accounts receivable are not depreciable assets.
How the Depreciation Process Works
You begin depreciating an asset when you place it into service. "Placing into service" means that the asset is "ready and available for use." Even if you don't use it immediately, you can turn it on and it works. You can't just buy a computer, for example, and let it sit in a box and begin to depreciate it; you must make it ready to use.
Depreciation is basically an accounting transaction. You don't have to do anything to the asset to depreciate it. During the time the asset 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 (a) you sell that asset or (b) it has reached the end of its useful life — then it is no longer is being depreciated. The length of time that an asset is depreciated depends on its class for depreciation purposes.