How does depreciation work for business?

Question

For example, say a business bought an asset that cost $100,000 and it has an economic life of 10 years, does that mean the business gets to write off $10,000 a year for 10 years in taxes, or am I understanding it wrong? Is there a limit to how much a business can write off in depreciation? Thanks

Answer 1

Yes, if the Company is using the "straight line" method of depreciation, for book purposes the Company would record $10,000 of depreciation expense per year for 10 years.

However, for tax purposes, a Company can use accelerated methods of depreciation, including MACRS double declining balance, etc. These "accelerated" methods allow the Company to get a higher depreciation deduction, and therefore write-off the asset in less time. There is no limit to depreciation expense.

For tax purposes, a Company can also elect to expense this purchase using Sec. 179, assuming it has net income of at least this amount. Using Sec 179 there is a limit of how much a Company can take as an expense. For 2006 the maximum Sec 179 deduction was $108,000. This limit is reduced if the cost of the Company's Sec 179 property placed into service in 2006 exceeds $430,000.

you can read more at www.irs.gov
http://www.irs.gov/formspubs/article/0,,id=109879,00.html

Answer 2

How Does Depreciation Work

Answer 3

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RE:
How does depreciation work for business?
For example, say a business bought an asset that cost $100,000 and it has an economic life of 10 years, does that mean the business gets to write off $10,000 a year for 10 years in taxes, or am I understanding it wrong? Is there a limit to how much a business can write off in depreciation? Thanks

Answer 4

If you are thinking of taxes, you have to consider the class life it falls under. It may range from three to 20 years. This is not always the same as the "book" depreciation. You must keep two sets of records, one for regular tax and one for AMT.

There is no limit to how much you can write off in depreciation. There are, however, limits as to how much you can expense under IRC section 179. You can expense a little over $100,000, provided your profits aren't much more than $400,000. In any case the section 179 deduction cannot create a loss.

If you have depreciable assets of that magnitude, you should engage a CPA as you evidently have a substantial business.

Answer 5

TMA is completely right. To add to her on the accelerated depreciation (MACRS). The IRS allows you to depreciate it over a life of:

Computer and Equipment - 5 years
Furniture and Fixtures - 7 years

Using MACRS, if your $100k asset was a computer or equipment. Then you would get $20k of depreciation ($100k x 20%)

If your $100k asset was furn & fixt. Then you would get $14,290 of depreciation ($100k x 14.29%)

This assumes you didn't buy at least 40% of all your new assets in the last 3 months of the year. In which case you would have to use the mid-year convention which is lower.

Here's a link for the MACRS table for half year convention

http://campus.murraystate.edu/academic/faculty/larry.guin/FIN330/MACRS.htm

Answer 6

claim car depreciation business usage

Answer 7

Deprecation for business is in general based on historical cost conventions.It varies from the type of asset (tangiable, intangiable or finacial) If you use straight line deprecation, as most assets are tangiable the cost convention states first calculate the useful life i.e 10 years and divide that into the inital cost price of $100,000 giving you deprecation of $10,000 a year. Thus your answer is correct aslong as the asset as no potential resale value or scrap value at the end of its potential usage.

Answer 8

You are basically correct.

The example you list above is called "Straight Line Depreciation". The same amount is expensed every year for the life of the equipment.