How to account for depreciation when doing the taxes for your small business

How to account for depreciation when doing the taxes for your small business? Depreciation for your small business is much more simple than it would sound. Here is how it works.

For example you purchase a company vehicle for your business. Then of course the vehicle will lose some of its value by you simply driving it off the lot. When you look at the vehicle as an item that is an operational asset in your running business. Then you can see that as that vehicle is used, and depreciated until it no longer has value. This process of losing value with time and use is depreciation.

In most cases with a business, your purchases will be able to be depreciated for tax purposes. However, there are some cases like land purchases that will not be able to be depreciated. The value of land generally rises, and does not depreciate. Land values vary rarely drop bellow a level to create depreciation.

Depreciation needs to be something that is an expense, which is listed in your income statement as an expense. Some ideas of what can be depreciated are buildings, vehicles, equipment, tools, furniture etc. Something that can go down in value over use and time.

In order to best find the annual depreciation for the assets you have purchased, you will need to know the initial cost of the asset. Then you will need to determine how many years that asset is made to last. How long this asset will retain its value. If you are not sure you can ask the IRS, your accountant, or even look it up on the Internet. Many times, like cars there are depreciation worksheets on the Internet to help business owners depreciate their assets. For example:

http://www.bized.co.uk/learn/business/accounting/busaccounts/deprec.htm

So using this idea, you can take a $20,000 truck and depreciate that truck as an asset over ten years time. Then you will need to decide with your accountant if you will be going with straight-line depreciation or if you will be going with the accelerating depreciation.

Straight-line depreciation is where the $20,000 would then have the value of the truck split up over the ten years. This is reported as an expense on your income statement at the end of each year for a tax write off.

If your accountant feels it is a better way to go to depreciate a higher amount of the $20,000 an then lower amounts as the end of the ten year period happens, then that is another option for claiming this expense on your income statements.
The main thing is that whether you need more of a write off early on, or if you want an even write off for the duration, that you make sure to not double claim this expense. This can cause tax-auditing issues.

There are additional regulations that you and your accountant should monitor in order to stay on top of any changes that would occur in depreciation of assets. There can be additional benefits or requirements that are not listed here.

Your taxes is something that as a small business owner, you should know need to be completed by a professional unless, you are one that has already taken tax preparation classes etc.

This is how you will need to account for the depreciation of your assets in your small business. At least you will be able to get the gist of it and be aware of what your accountant will be doing with your assets.

Rating: 0/5 (0 votes cast)

---

Categories: Tax,

Help others find this article:
Socializer, Digg, del.icio.us, reddit, StumbleUpon

Favorites: Add to favorites
Tags: how_to account depreciation when doing taxes small_business