When you make a big purchase for your business for things that will last for awhile, you get a couple different options for how to take that expense on your taxes. You can either take the full expense in the year you bought it, or you can spread the cost out over a few years. That second option—spreading it out—that’s what depreciation is.
Simply put, depreciation is a way to spread a big equipment expense over multiple years. When you buy something like a computer, you have the option to take all of that expense in the year that you bought it or push it on to future years. We can help you think through which option might benefit you the most.
Almost everything wears out or becomes obsolete over time. Because of this, the tax code allows assets (or “Big Equipment” as we call it on our website) used for your business to be taken as a yearly deduction for a set number of years, based on what kind of equipment it is.
To be considered depreciable, the asset, or big equipment, must be:
- owned, not leased or rented,
- used in a trade or business to produce income,
- have a useful life of more than 3 years, or
- something that wears out or loses its value.
- It can’t be an item, such as land, subject to special tax code provisions.
There are lots of ways to calculate depreciation, and certain assets have to use different rules than others. We’re here to make sure you follow the right rules. But the main takeaway for you is that when you do make a big purchase, be sure to list it in “Big Equipment” and when we have our tax appointment, we’ll talk through what makes the most sense for your situation, whether it’s taking all the expenses now, or helping out “future you” by spreading things out.
This is definitely an area where it helps to have a tax pro take care of the heavy lifting—and we’re happy to help. Sign up for an account on our website to get started on your taxes today.