Deprecation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. It is an allowance for the wear and tear, deterioration, or obsolescence of the property.
You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first.
This can be especially helpful if your business expects to increase income in future years. IRS rules specify the depreciation rate and number of years for each type of property. Examples of depreciable property include machinery, equipment, furniture, vehicles, buildings , and certain land improvements. To qualify for deprecation. The property must meet all of the following requirements:
It must be property you own
It must be used in your business or income -producing activity
It must have a determinable useful life
It must be expected to last more than 1 year
The costs of intangible assets, such as goodwill, patents, business records, customer lists, trademarks, software, etc. are deductible using amortization, which is similar to depreciation.
Record the cost of depreciable items as fixed assets rather than current expenses. You may wish to create separate fixed asset accounts for each type of property to make it easier to track your assets. For depreciation thresholds, please discuss with your accountant.
Tip: Depreciation is a crucial tax-planning tool as you consider current and future income. Your tax accountant should discuss various depreciation options with you and help you make decisions. Then he or she can give you the depreciation deductions for the year and a journal entry to record the expense in Sunrise.
Sunrise and Lendio do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide and should not be relied on for tax, legal, or accounting advice. You should consult a tax, legal, and accounting adviser before engaging in any transaction.