What Is Depreciation And When Should I Use It?

what is depreciation

Are you a small business owner looking to get the most out of your refund? Chances are you’re not a first-time visitor to this blog. We’ve written before about what documents to hold onto for your refund. And also about secret write-offs that you may not be taking advantage of. However, here’s one trick you may not have up your sleeve yet. Depreciation.

Related: Small Business Budgeting Tips

What is Depreciation?

Any item loses value over time due to age, use and inflation. A depreciation deduction is how the IRS recognizes that your possessions decrease in worth and therefore should be taxed less and less. In essence, it lets you write off certain purchases a little at a time.

What Qualifies for Depreciation?

To qualify for a depreciation deduction, you must claim depreciation on a fixed asset that has an expected lifespan. Often, this means equipment or non-consumables that will foreseeably need replacing within a certain time.

Depreciations can only be claimed on assets that are for business use. If it is used for both business and personal purposes, you must be able to show that it is used for business purposes more than 50 percent of the time. A printer in your home office may also be used for personal printing so long as it does not constitute more than half of the printer’s use. Any business assets that pertain to a home office, you may also be able to write them off as a home office expense.

During the 2015 tax year, you can write off depreciations up to $25,000 for equipment purchases that did not exceed $200,000. These relatively small numbers make this a great deduction for smaller businesses.

Why Does This Help?

You won’t get the full write-off in your first year of purchase. This means you won’t have quite as large a refund as you otherwise might have. Claiming a depreciation deduction does have quite a few long-term benefits.

  • Claiming the deduction over several years gives you a little extra on your refund for the years that you didn’t make the purchase. It’s like a gift that keeps on giving.
  • If you expect to be in a higher tax bracket in a few years, saving part of your deduction for later will help to limit the amount of tax you actually have to pay.
  • You can even claim different depreciation types for different years. With accelerated depreciation, you can get a larger refund in earlier years and still collect a refund in later years as well.

Related: What Documents Your Company Needs to File Your 2015 Taxes

For more information on claiming a depreciation deduction, give Hacker Accounting a call at 602375-5251.

Chris Hacker
Chris has been working in the bookkeeping and accounting field for over 15 years preparing business, income and payroll taxes. Chris has a bachelor’s degree from Arizona State and is an Enrolled Agent with the Internal Revenue Service.