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Depreciation Basics

Client Education: Depreciation (updated 2022)

3-minute read

What.

Depreciation is a tax deduction that spreads out the cost of business assets over their useful life.

  1. It must be business property - Used for income generating purposes (things like, office equipment, furniture, vehicles, real estate, etc.)

  2. It must be used longer than a year - If it’s not expected to be used or owned longer than a year, you will expense it fully in the year it was purchased.

  3. It must cost $2,500 or more - A de minimis safe harbor rule allows property under this $2,500 to just be expensed in the year it was purchased.

For example: Instead of deducting the cost of a refrigerator in the year it was purchased, you will deduct 1/5th of the cost each year, for 5 years.

Why.

Spreading out the cost of business property helps match it with the benefit or use over time. Or, you can think of it as using up its usefulness, expressed in dollars per year. You can still use the item after it has been fully depreciated, or, you may also end up abandoning, selling or any other method of disposing of the asset before you completely depreciate it.

How.

Track Fixed Assets in QuickBooks

  • Create a fixed asset account or use a fixed asset category to book the purchase of the new asset. Make sure to provide as many details like serial numbers or model numbers when available.

  • At year-end provide a list of all fixed asset additions (and dispositions) to us as part of your tax preparation documents.

  • Each asset will be set up on a depreciation schedule on your tax return, following the IRS rules. This schedule keeps track of all depreciable fixed assets, their initial cost (basis) and prior depreciation (accumulated) amounts.

  • Record the current year depreciation in QB with a journal entry dated 12/31/xx to debit “depreciation expense” on the P&L and credit “accumulated depreciation” on the balance sheet.

*This is a simplified overview of depreciation for tax purposes. All facts and circumstances have not been expressed.

Still have questions? Give me a call and we can discuss. :)