Depreciation is one of the most powerful business accounting and tax saving tools, but many business owners don't appreciate it. It's kind of the Rodney Dangerfield of expenses - it gets no respect. I asked CPA Gail Rosen to discuss ways that depreciation benefits your business and saves you money at tax time.
1. Depreciation is a non-cash charge - this is a good thing.
Depreciation is something that you can get a tax deduction for buying business assets in the current year even though you might not have spent money to buy it in that year. To get the depreciation deduction, though, you must have put the asset into use in the current year.
Depreciating assets give you more income on your profit and loss statement and increases your assets on your balance sheet. The computer you bought in 2009 for $5,000 less the depreciation of $1,000 taken in 2009 leaves a net income of $4,000 and increases your assets on your balance sheet by the same $4,000.
3. Accelerated depreciation allows you to take more depreciation faster
When you depreciate, or "write off," an asset over its useful life, you can take more depreciation in the initial years with accelerated depreciation. The benefit of accelerated depreciation is that you are getting more of a tax deduction in earlier years and therefore you get a return of more of your tax money earlier versus later. Section 179 deductions and bonus depreciation are examples of accelerated depreciation.
4. Timing depreciation can help you reduce taxes in higher income years
It is important to realize that depreciation is not now or never... it is now or later. And sometimes taking the deduction in later years is better. If you expect to be in a higher income bracket in later years, it would not be in your best interest to accelerate the deduction but instead to write off the asset utilizing the straight line method (that is, an equal amount of depreciation every year); therefore saving the deduction for the years you are in a higher tax bracket.
5. Depreciation is complicated, but worth the trouble
The determination of the depreciation method that will work best for you can be time consuming; however, the benefits of taking the depreciation deduction in the years that most benefit your financial statements and tax returns are worth the effort. Having a first-rate CPA on your team is always important!
Disclaimer: Remember, this blog post and Gail's statements are not intended to be financial or tax advice. Your specific situation should be discussed with your CPA and tax adviser before you make any tax decisions.
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