A Simple Guide to Tax Depreciation


One of the benefits of running a business or working for yourself is that you can write a lot of things off on your taxes.

Tax depreciation is one way to reduce your tax bill whenever you buy equipment or real estate.

You can take the tax benefit now, or you can spread it over the lifespan of the asset. Keep reading to learn about what qualifies for the deduction and how you can take it.

Who Can Take a Tax Depreciation?

The idea of a depreciation tax shield is appealing to many.

Who wouldn’t want to save money on their taxes?

However, not everyone can take tax depreciation. Before you deduct the depreciation of your assets from your taxable income, you have to fill a few requirements.

  • You must own the property
  • It has to last more than a year
  • It needs a given useable life cycle
  • You have to use it in a business or to make income
  • It can’t be excepted property

If you don’t meet even one of these requirements, you can’t apply the item’s depreciation to your taxes. So even if you buy a new fancy computer, if you only use it for personal stuff, you can’t utilize tax depreciation.

As long as an asset meets all of the requirements, you should be able to calculate its depreciation. Then, you can take the depreciation without worrying about penalties.

What Can You Calculate?

You can calculate a variety of assets when dealing with tax depreciation. As long as you use it to make money and it has a decent lifespan, you can probably include it.

Some common examples of depreciation include real estate, land improvements, office equipment, and tools. You may find you can include items for your specific business.

For example, musicians can include any instruments that they purchase for use to make money. A manufacturing plant can include tools and equipment they use.

Consider what you use to make money and how long it lasts on average. If you want to have a depreciation tax shield for a certain item, consult a lawyer or accountant for individual guidance. 

How to Calculate Tax Depreciation

If you decide to use tax depreciation to write off costs for your business, you should calculate them correctly.

You can find a tax depreciation calculator, but you can also do the work yourself.

There are a few tax depreciation methods you can use, so you should compare them. Then, you can decide which method is best for you and your business.

You may find that what works for a friend won’t work for you. Consider the basics of the most common tax depreciation methods.

Straight-Line Depreciation

Straight-line depreciation is probably the most common option for calculating depreciation and taxes. It uses the Modified Accelerated Cost Recovery System (MARCS) to calculate depreciation.

The IRS gives two options within MARCS, including the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). You can probably use GDS unless you have a special case.

Be sure to consult an accountant for advice on which option is best for you. Then, use the IRS guidelines to determine the life of your asset.

You can depreciate assets starting in the middle of the month, quarter, or year. You’ll depreciate the value of the asset over the average life of it. For example, you can depreciate a computer for over five years.

Section 179 Expense Deduction

If you want to take a tax deduction for the entire cost of an asset in the first year, you can use Section 179. You can deduct the entire value of the asset within the first year as long as it’s in service during the year.

So you can’t buy an asset in December but wait to use it in January and take the tax break. You’ll have to wait until the next year.

As of 2020, you can deduct up to $1.04 million. The capital allowance rates for this deduction increase to keep up with inflation, so the amount can change next year.

Accelerated Depreciation

Accelerated depreciation is a compromise between straight-line and Section 179. You will still spread out the deduction over a few years. However, you will take more of the tax breaks early on.

Sometimes, this method is called a declining balance method. It takes away the same percentage of the value each year, so the tax break will get smaller as the remaining value decreases.

With the straight-line method, you depreciate the same dollar amount each year. Then, it will be equal.

If you want to get more of the tax breaks sooner, you should use accelerated depreciation. You’ll still have a deprecation tax shield for a few years, but you won’t have to wait as long to receive more of the tax break.

How to Take a Depreciation

When utilizing tax depreciation in your business, you should do so correctly. You don’t want to overestimate the value of your assets, but you also want to make the most of the depreciation.

Here’s what you can do when dealing with depreciation and taxes.

Gather Your Receipts

Whenever you buy an asset that qualifies for tax depreciation, keep the receipt. You will need it to prove the value of the asset when you file your taxes.

If you have a lot of assets, make a folder to track all of the receipts. But if not, you can keep the receipts somewhere safe.

Work With an Accountant

If this is your first time taking a depreciation tax shield take your taxes to an accountant. They will know the rules and regulations, and they can help you decide between tax depreciation methods.

You can bring your receipts to your accountant, and they can do all of your taxes. Then, you won’t have to spend time crunching the numbers.

All About Tax Depreciation

Tax depreciation can be a great way for you to save money on your business taxes. But you want to make sure you do it right.

By working with an accountant and following the requirements, you can enjoy the tax benefits whenever you buy a new asset.

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