Depreciation for Small Businesses

The IRS offers us a variety of depreciation options for tangible assets to help our clients considerably reduce their tax bills. Help your clients understand the tremendous opportunity they have in business depreciation by explaining to them what assets can be depreciated and the options they have to maximize their benefits. 

Explain to your clients that almost every expense they incur in the operation of their business can be deducted, either as a business expense or through depreciation. It’s critical that they keep thorough records and provide you with information about every possible item that can be deducted. 

Tangible assets that can be depreciated

The distinction is fairly simple: If the expense is for a tangible asset that would be used up in a year or less, it’s considered a business expense, such as office supplies. If, however, the useful life of the tangible item is more than one year, in most cases it can be depreciated. 

Requirements in order for a tangible asset to be depreciable:

  • Your client owns the asset, even if a loan was taken out to purchase it
  • It is used for the business or to produce income
  • It has a limited useful life – i.e., it eventually wears out or is used up
  • Its useful life (or the time the client expects to use it) is greater than one year

Examples of tangible assets that can be depreciated include:

  • Buildings
  • Vehicles
  • Equipment, tools, and machinery
  • Computers and other technological hardware
  • Office furniture

Land is not depreciable. Patents and copyrights and certain other intangible assets can be amortized. Depreciation for an item ends at the end of its useful life or when the company stops using it, whichever comes first. 

Options for depreciation

You have the flexibility to help your client save money using a wide variety of depreciation options. A client who does not know much about accounting may think only of the straight-line method: depreciating the value of the asset evenly throughout the course of the asset’s expected useful life. For instance, if you expect a $10,000 machine to last 10 years, with the straight-line method you would take $1,000 depreciation each year. 

But what if your client expects to sell the machine in five years? In that case, your client would have lost out on $5,000 in depreciation using the straight-line method. 

You can choose from a variety of methods to accelerate depreciation, and in addition, Section 179 and Bonus Depreciation offer other ways to help your clients save. 

What your client needs to tell you

Explain to your client that you need thorough records about each asset so you know the best method to use. That would include:

  • Description of the asset
  • Date of purchase (new or used)
  • Total price, including all fees, taxes, dues, or premiums required in the purchase
  • Expected useful life
  • Expected period of time the client reasonably expects to use it for business
  • Salvage value once it is past its useful life
  • Likely quantifiable output of the item (if you are considering units-of-production depreciation) 

With this information, you will be able to compare the different depreciation options for each tangible asset and reduce the tax burden on your client’s business.   

Educating your clients about the depreciation options helps improve the quality of information you receive from your clients because they see its importance. Sharing information like this also elevates your value in the eyes of your clients, increasing their loyalty and the likelihood of referrals.