If you're starting your own small business, you probably have to purchase at least one large and expensive piece of equipment or property. Such business purchases can create some confusion among new business owners who must figure out how to fit these items into their Schedule C for income tax purposes.
To help you get a better grip on your business finances, here's a quick guide to the ins and outs of depreciating assets.
What is Depreciation?
While many people have heard of the term, few really understand the purpose of depreciation and how it affects them. Depreciation, simply stated, is calculating a portion of the cost of a large asset that can be used as a business expense each year. Why would you need to do this? For one thing, it helps you even out the costs of large asset purchases by allowing your business to deduct those costs over several years rather than all in one year.
What are Your Depreciation Options?
Generally, the IRS issues guidelines for how many years you may deduct depreciation expense for each class of item you buy. However, the PATH Act of 2015 extended until 2019 the option to deduct up to half of the asset's cost (50% depreciation) in the year the item was placed into service. This might help businesses that would benefit from having a large expense deduction to claim immediately in order to reduce tax liabilities.
Which method of depreciation is right for your business? It would depend on many factors, so you may want to discuss all the options with a professional accountant or tax
How Do You Claim Depreciation?
The IRS provides guidance for calculating depreciation in Publication 946. Most business assets are depreciated under a method known as MACRS. Consult Publication 946 to determine how many years you may depreciate the item for. The cost (basis) of the asset -- possibly also reduced each year by the previous year's depreciation deduction -- is divided by the allowed number of years. You may also use a percentage provided in Publication 946. This is your annual depreciation cost that you may use on your business' Schedule C.
Depreciation can be complicated, so if you have any questions, you may benefit from working with an accountant with experience in business tax preparation. The result can help lower your tax bill significantly and give you more control over your financial picture. To find out more, speak with someone line Hough & Co CPA.