When purchasing assets, every business owner should be aware that the value of most assets will reduce over time. Vehicles, capital equipment, and even inventory will gradually cost less over the years, which means that you'll probably end up selling those items at a lower cost.
Accounting standards mandate that depreciation should be classified as a business expense. But how can you determine the depreciation cost, and how does it apply to your small business? Are there specific things that small business owners should know with regards to depreciating assets? Read on to find out.
The cost of many different assets can be depreciated
The depreciation expense applies to many different assets in your small business. From your work computer to the office supplies that are used daily, depreciation allows you to keep track of how much value your items have lost over time. But you shouldn't be discouraged about this loss in value. In fact, small business owners are able to deduct business expenses from their taxable income. This makes it more reasonable to deal with depreciation costs without affecting the profitability of your business.
But keep in mind that specific criteria apply to depreciable assets. For example, the assets must be for business use and owned by you. The asset should also be usable for more than a year, which is what will allow you to spread out the value reduction over time.
There are four ways of calculating depreciation
Part of what makes depreciation difficult to understand is the different ways through which it can be calculated. There are four main ways of calculating this expense, and each way has its own benefits and drawbacks. For example, straight-line depreciation allows you to deduct the cost of your equipment in equal amounts for a set number of years. This method of calculation is easy to do and provides a predictable way of preparing your tax records.
You can also calculate depreciation using an accelerated method where the expense becomes smaller over time. This option is useful if you wish to record lower depreciation costs after owning a piece of equipment for several years. There are more ways of calculating depreciation using a combination of the straight line and accelerated methods.
A tax consultant can help you select the most appropriate tax depreciation
Every small business operates under a unique set of circumstances. Some may wish to maintain as much cash flow as possible, while others may predict future growth and thus better revenue over time. These circumstances will affect how you should calculate the depreciation expense. For example, businesses that wish to maintain steady cash flows may opt for the straight-line method. A tax consultant can help you decide the best option for handling depreciation and maximizing savings.