Why is Depreciation Important?
An understanding of depreciation is important for business owners, because:
- Depreciation is a business expense, so it reduces your tax liability by reducing your income.
- Businesses need to consider replacing assets periodically as they wear out or become obsolete.
What Kinds of Assets Does the IRS Allow to be Depreciated?
According to the IRS, in order to be depreciated, property must:
- Be property your business owns,
- Be used in your business or investment activity,
- Have a determinable useful life, and
- Be expected to last more than one year.
You cannot depreciate land, property you bought and disposed of in the same year, or certain type of intangible assets such as franchises, non-compete agreements or goodwill.
