Depreciating assets are a valuable accounting tool to help with the costs of the things you absolutely need.
As everything from cars to equipment to even our office can depreciate, our clients often wonder what they should do when it comes to their spending. As depreciation can be a confusing science, we decided to break down what these assets are, as well as how you should focus your thinking around them.
What Defines A Depreciating Asset?
A depreciating asset is something that has a limited effective lifespan or anticipation of decline over time.
Some popular examples of depreciating assets include cars/transportation, technology (such as employee laptops), machinery, and office space.
While some depreciating assets can maintain their value with proper maintenance and care, almost all of them will expire. For accounting purposes, this makes it easier to write-off losses of what’s a necessary function of your business.
Depreciating Assets Are A Necessary Business Function
Depreciating assets usually include those ‘can’t live without’ items of your business. For example, buying a truck for deliveries or machinery to offer new products/services almost always will help create better revenue flows; however, these are also things that incur losses. For this reason, depreciation is useful, but don’t get too comfortable in looking at it as an easy write-off.
…depreciation is useful, but don’t get too comfortable in looking at it as an easy write-off.
Depreciation Requires Knowing How The IRS Looks At The Lifespan of An Asset
A good reason why it’s important to assess the need for incurring depreciating assets is that they can sometimes be tricky to put together. Especially if you’re unseasoned with depreciation costs in accounting practices, coming up with figures that are reasonable in the eyes of the IRS means following their depreciation guidelines, as well as not trying to over-exaggerate the wear-and-tear on something. While certain equations are pretty streamlined (such as the standard deduction for mileage), others can get somewhat hairy…and depending on the complexity of your tax situation in general, it might be something you want to have reviewed by an expert.
The Losses On Them Aren’t Always Worth It
Just because depreciating assets show up as losses doesn’t necessarily mean they’re something that gives you any flexibility spending-wise. In other words, if you’re moving money around, very rarely will you say “let’s buy a new truck to take on the depreciation”…primarily because you have not only the upfront costs but the maintenance as well. When you consider the asset is valued less as soon as it’s taken off the lot, this asset is more trouble than it’s worth. Instead, look primarily at depreciating assets as a means of helping with things you definitely need, not ‘might want’.
Ultimately, Depreciation Boils Down To The Potential ROI
The biggest consideration with your ‘must-haves’ is what the ROI is going to look like beyond how the asset depreciates.
For example, if I have a bakery that wants to expand into doing coffee service, but doesn’t know if it’ll be successful for their customer base…then spending less than $10,000 on a used espresso machine versus new makes much more sense to reduce the incurring depreciation. If the asset pays itself back in time, then not only might you see the value of the depreciation play into your favor, but it could also lead to paying into improvements for something that could have a long shelflife.
Ultimately, this is a game of buying for the long-haul…so spend accordingly.
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