How does "depreciation" in a small biz benefit me in the pocket?

Question

I see depreciation on the p&l and I'm trying to find out how that actually puts cash in my pocket.

Answer 1

You pay less in current taxes - this is true. But depreciation is a concession from the IRS based on the fact that your depreciable assets have declined in value over the course of the year.

To compensate for the fact that these assets are declining in value (wearing out) you should save the money to purchase replacement assets in the future when these assets are completely useless. When you do this, your cash is a wash.

If you spend the cash rather than saving for the future "rainy day" then you have more cash in your pocket as you suggest.

Practically speaking, in a small business you can expense (write off immediately) more than $100,000 of assets each year that in large companies would have to be capitalized and subsequently depreciated. If your situation permits, consider this immediate writeoff rather than cap and depre.

Good luck,
Dana B.

Answer 2

You pay less in taxes