Depreciating Assets

Depreciation is the process of deducting the cost over time of a tangible or physical asset you bought for your business. When you depreciate assets, the amount of money you write off each year reflects how much of the asset’s value has been used up. Some examples of assets that can be depreciated by small businesses include vehicles, office furniture and equipment, computers and buildings.

Claiming a Section 179 Deduction

Instead of depreciating an asset over its useful life, a Section 179 deduction allows a business to deduct the entire cost of certain assets purchased in the year the purchase was made. The amount a business can write off and the types of assets that are eligible for the Section 179 deduction are subject to limitations. The asset purchased must be used in an active business, so passive activities generally won’t qualify for the deduction.

For Certain Assets, Bonus Depreciation

Certain types of assets are eligible for 100% bonus depreciation in the year they’re purchased, and there is generally no limit on how much a business can write off. If bonus depreciation causes a loss, the loss can be carried forward. Bonus depreciation is available only until 2022, after which it begins to phase out, ending in 2026.

For Tax Purposes, Regular Depreciation

If assets aren’t eligible for either Section 179 or bonus depreciation, a business generally can depreciate property for tax purposes using MACRS. MACRS stands for Modified Accelerated Cost Recovery System. When your company purchases an asset for your business, the IRS allows you to deduct a portion of the cost each year over the asset’s expected lifetime.

Under MACRS, assets are assigned to a specific asset class. The asset class determines the asset’s useful life and the number of years the business will depreciate the asset. As an example, vehicles and computers are depreciated over five years, while commercial real estate is depreciated over 39 years.

Depreciation calculations can be complex. If you have assets that could be subject to depreciation, seek guidance from your tax professional.