Thompson & McCarty, P.C. CPA

This is a very light discussion about depreciation. For a technical reference click here. Depreciation is the periodic expensing of assets over their useful life. The theory is that some assets (referred to as fixed assets) benefit a business over a greater period of time than just the year that the asset is purchased and placed in service. GAAP (generally accepted accounting principals) requires depreciation of fixed assets. More importantly to most people, the IRS requires depreciation too. The goal is to match the using up of an asset with the associated revenue generated from that useage. Some examples of depreciable assets are furniture, desks, trucks, planes, barns, fencing, computers, tractors, trailers, and buildings.

GAAP depreciation and IRS depreciation are not typcially the same animal. GAAP depreciation is typcially straight line depreciation. The IRS allows several types of depreciation but the most commonly used method is Modified Cost Recovery Systems often referred to as MACRS. The difference between straight line depreciation and MACRS depreciation can be very significant. Over the useful life of an asset the ultimate depreciation expense will be close to the same. However, MACRS will generally yield a higher expense in the early years and less expense in the later years of the life of an asset. Also, MACRS depreciates all th cost of an asset while Straight Line depreciation requires a salvage value. This difference can be substantial and can be very important to a business and the accumulation of capital.

Another important aspect of the IRS code, as it relates to fixed assets, is section 179 expense. In short, this is simply expensing a larger portion of the assets purchase price than standard MACRS would allow in the year an asset is placed in service. Again, this can be a very important factor in capital accumulation for a business. Suffice it to say that buying assets without consulting with a tax professional is poor management.

The acquisition of assets can be one of the most important business decisions one will make. The proper planning of when to purchase an asset, how much to spend on assets in a given year, and how to depreciate an asset to your best advantage should be discussed with your tax professional before you purchase an assets. Naturally, the larger the ticket the more important the planning. If you have questions concerning your tax situation contact us.