What is depreciation? Depreciation is the name of the expense that we recognize when we write off the cost of an asset over some period of time. Now, typically, if an asset is meant to last more than one year, we don’t get to expense it all at once and we have to write it off slowly over its useful life.
Now the reduction on the books of the value is sometimes correlated to the reduction of what’s happening in real life to its fair market value. Let’s think about a delivery truck. We get to expense that over the course of five years. Now, obviously, a five year old truck is worth less than a brand new truck, but it’s probably not worth zero.
So depreciation doesn’t always completely correlate with what’s happening to fair market value. Think about a building, for instance. A building that’s ten years old might be worth more than it was when it was purchased originally. Yet we still get to depreciate and write off the building over time. Now, the tax rules about how fast we can write off assets change all the time.
There are special rules that let us write off everything in the first year in some cases, which can be a really helpful tax strategy because you get bigger expense, which means you have lower income and pay more tax. It can also be a practical expedient. A $10 stapler might work perfectly well for ten years, but we certainly don’t want to have to keep making journal entries to expense $1 of the stapler every year for ten years.
So depreciation is an important bookkeeping and tax strategy. You just need to make sure that we’re using the appropriate rules for your situation, your type of business, and the kind of assets that you purchase.
If you have any further questions about how depreciation can benefit you this tax season, reach out to an Alloy Silverstein advisor today!
Associate Partner
Julie has over 20 years of experience in public and private accounting, representing varied clientele including the medical, legal, and real estate industries and trusts.
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