Depreciation is a method where the cost of fixed and tangible assets is allocated over time. Depreciation effectively measures how much an asset’s value has been exhausted within a given time. This tax write-off allows small business owners to assess the value of an asset over time while factoring in its age, wear, and decay.
The purchase of a fixed asset can be an income tax deduction that allows taxpayers to recover the cost of property or assets they've “placed in service" in the course of their trade or business. They generally can't deduct the entire cost of an asset in the year of purchase if it's a capital expenditure, but they can break the cost down over a number of years instead in a process known as depreciation.
Percentage deductible: 100%
The taxpayer must own the asset.
The asset must be used for income-generating operations.
The asset must have an estimated useful life expectancy.
The asset’s determinable lifespan must exceed one year.
The business must own the property, and it must be used to generate income. Intangible property generally doesn't qualify, nor does equipment that's intended to build capital improvements. The asset must have a useful life that can be determined, and it must be expected to last more than a year.
Depreciation vs. Business Expenses:
Deductible business expenses commonly include cash transactions such as business luncheons, which are fully deductible in the year in which they were incurred. The expense of purchasing a fixed or tangible asset can be spread out over a number of years when it's depreciated.
In some cases, businesses might have a choice as to how to take a deduction. They can either deduct the entire cost in the first year when it elects to write it off as an expense, or it can depreciate it and write the asset’s value off over its useful life expectancy. For example, a business can take the entire $70,000 in year one or deduct $10,000 a year for seven years when it purchases a $70,000 piece of equipment unless it's clearly a capital expenditure.
Bonus depreciation allows taxpayers to claim a larger portion of depreciation on assets purchased within the tax year. With bonus depreciation, up to 100% of an asset’s cost can be deducted as long as the asset is business qualified.
Check out the link below for a list of other tax deductions you can claim this tax season!
What questions do you have about tax season? We are here to provide help with tax preparation, accounting, payroll management, and business formation! R&I Tax and Bookkeeping is here to help! You may contact us via our 'Contact' page at https://www.ritbsinc.com/contact. We can also be reached via phone at 253-777-1106.
Perez, W. (2020, March 25). How Depreciating Assets Can Affect Your Business Taxes (2020). Perez. Retrieved January 11, 2022, from
Osterhaus, E. (2021, February 1). Complete list of small business tax deductions (2021). QuickBooks. Retrieved December 16, 2021, from https://quickbooks.intuit.com/r/taxes/small-business-tax-deductions/