Many businesses have just wrapped up or in the middle of tax season. The one time of year where everyone frantically searches for receipts, invoices, and financial records. There are many IT products that can be used as depreciable assets. This allows your business to write off a portion of the equipment’s expense every year. Many IT products will actually pay for themselves over time due to this tax policy and money saved in operations.
What are Depreciable Assets?
Depreciable assets are business assets where the value of the asset is considered as a business expense over the life of the asset.
Why are Depreciable Assets Important?
Anything you buy for your business use can be deducted as an expense on your business tax return. Some assets you buy may be deducted immediately, while other assets have a long-term life and these assets can be deducted over the years of their life.
For example, if you buy a car for your business, you can deduct the cost of the car over a specific number of years. This is depreciation, and it’s a benefit to you for tax purposes to be able to take these deductions.
The IRS uses the term “depreciable property.”
What Assets Can Be Depreciated?
You can depreciate most types of property you can see and touch, including:
- Furniture and fixtures
You can also depreciate most property that has no form including
- Computer software.
The IRS has specific requirements for property to be able to be depreciated:
- It must be property you own
- It must be used in your business or income-producing activity
- It must have a determinable useful life
- It must be expected to last more than one year
How the Depreciation Process Works
You begin depreciating an asset when you place it into service. Placing into service means that the asset is ready and available for use. Even if you don’t use it immediately, you can turn it on and it works. You can’t buy a computer and let it sit in a box and begin to depreciate it. It has to be readily accessible and available for use.
Depreciation is an accounting transaction that happens behind the scenes. During the time the asset is being used, a certain amount of the cost is put into a depreciation expense account, and the initial cost of the asset is reduced by the same amount. At the end of the year, accumulated depreciation for the year is shown on the business financial statements, along with the initial cost of all the property being depreciated.
You stop depreciating a business asset when you sell that asset or it is no longer in its useful life. Useful life is the length of time that an asset is depreciated determined by classes created by the IRS.
What does this mean for IT?
The software and hardware you use for business operations is a potential depreciable asset. Do your employees use Microsoft Office software? Did you invest in new Surface tablets for your sales team? Need to replace your server? All of these IT updates are potential depreciable assets. To maximize your IT invest be sure to ask your IT professional or tax professional for more information about depreciating these assets.