Whenever you make a business purchase that you will use for more than one year, the Internal Revenue Service (IRS) requires it to be depreciated. This means writing off the cost on your business taxes over time (rather than the year when you purchase it).
Learn more about depreciation in our Depreciation Video Guide. Instructions: Please click 'Start' and answer the questions to determine if a purchase that you make for your business is subject to depreciation.
Is the item ordinary and necessary for your business?
“Ordinary and necessary” expenses are those that are typical and crucial for running a business. Two examples are: 1) Monthly utility bills for electricity and water and 2) Staff salaries and wages.
Is the life of the item more than 1 year?
"Useful Life" in depreciation refers to the expected duration that something is anticipated to last and remain productive. These durations are established by the IRS in terms of years. For instance, tables, chairs, and other furniture in the child care facility might have a useful life of 5 years. Although you may be able to use them for a longer period, in the eyes of the IRS, they are considered 'done' after 5 years.
If the item is not “ordinary and necessary” for your business, then it is a personal expense that is not deductible from your business taxes at all.
Expense doesn't require depreciation
If the life of the item is less than 1 year, there's no need to depreciate. Report it as an expense using the time-space calculation if needed.
Expense doesn't require depreciation
If the asset costs under $2,500, there's no need to depreciate. Report it as an expense using the time-space calculation if needed.
Expense doesn't require depreciation
If the expense was a repair, there's no need to depreciate. Report it as an expense using the time-space calculation if needed.
Depreciate in one year using Section 179 or Bonus Depreciation
Depreciate in one year using Section 179 or Bonus Depreciation, using the time-space calculationif needed (note that cars have an exception based on the weight of the vehicle).
Depreciate over 39 years
Your home or center building can be depreciated over 39 years.
Depreciate as as an Small Business Safe Harbor Expense
Depreciate the improvement as an Small Business Safe Harbor Expense, using the time-space calculation if needed, and attach the statement as per the guide.
Depreciate using Form 4562
You can utilize IRS Form 4562 to depreciate this expense and claim your deduction for depreciation and amortization.