As a small business owner, you regularly invest in property and equipment to keep your operations running smoothly. From a new computer to a company vehicle, these assets are essential. Depreciation is a fundamental tax deduction that allows your business to recover the cost of these assets as they age. Understanding how to apply this deduction correctly is key to managing your business's finances.
What Property Can My Business Depreciate?
Your business can depreciate tangible property when you place it in service to produce income. The core idea is that since the asset wears out or loses value over time while helping you do business, you can deduct a portion of its cost each year.
Common examples of depreciable property include:
- Machinery and Equipment: This covers everything from manufacturing machinery to the point-of-sale system in a retail shop.
- Business Vehicles: The cars, trucks, or vans you use specifically for your business activities are depreciable.
- Furniture: Desks, chairs, and other furniture used in your office or commercial space fall into this category.
- Buildings: If your business owns the building it operates from, the structure itself can be depreciated over time.
What Can't Be Depreciated
Not every purchase counts. Items that cannot be depreciated include:
- Land, since it does not lose value over time
- Inventory, because these are items held for sale
- Personal-use property, unless the business portion is clearly documented
- Leased property, unless the lease meets specific ownership rules
If there's any uncertainty, it's smart to talk to a tax professional before listing anything as a depreciable asset.
When to Stop Depreciating Property
Depreciation ends when either:
- The entire cost has been deducted
- The item is taken out of business use, such as being sold or scrapped
Once an asset has fully recovered its cost or is no longer in service, you can't claim depreciation on it anymore.
FAQs
Can I depreciate my car if I use it for both work and personal errands?
Only the business-use portion qualifies. You'll need to track mileage or use a reasonable percentage.
What's the difference between Section 179 and standard depreciation?
Section 179 allows you to deduct the full cost of qualifying property in the first year. Standard depreciation spreads the cost out. Your CPA can help you determine which option makes the most sense for your business.
Do I need to file anything to claim depreciation?
Yes. You'll usually need to submit Form 4562 with your tax return to claim depreciation and related deductions.
Why You Should Talk to a CPA First
Depreciation rules are technical, and getting them wrong can lead to penalties or missed tax savings. You'll also need to file Form 4562 to report any depreciation or special deductions like Section 179 or business-use vehicles.
A CPA can help you:
- Identify what qualifies and when to start
- Choose the right method and schedule
- Use tax-saving tools like Section 179 or bonus depreciation
- Plan larger strategies, including cost segregation for commercial property owners
At Myrick CPA, we guide small business owners in D.C. and across the country on how to manage depreciation correctly and make it work in their favor. Ready for help figuring out what you can depreciate this year? Schedule a consultation and we'll walk you through it to help you make informed, IRS-compliant decisions.
