Depreciation is one of the major contributors to small business tax deductions. It is the annual reduction in the value of the assets of a business. Apart from helping the business acquire funds that are required to meet the cost of repairs and replacement of the asset (after its effective life ends), depreciation also brings tax reduction to the business. It allows you to recover the cost of the asset.
Criteria for Depreciation
There are certain criteria that an asset is required to meet in order to be eligible for depreciation. Firstly, the asset needs to be owned by the business and it should be used by the business in an income producing activity. Moreover, the asset should have an estimable life which extends beyond a period of one year. All tangible assets except land and a few intangible assets, such as patents and copyrights, are eligible for depreciation.
The Elements of Depreciation
There are certain important aspects that need to be considered for depreciation. These include the expected life of the asset, the basis on which the property can be depreciated, the depreciation method to be used, whether the property falls under the category of listed properties, and finally whether the property qualifies for any bonus during the first year of depreciation.
The Modified Accelerated Cost Recovery System is the most commonly used method to calculate the depreciation of almost all forms of assets. After calculating the depreciation amount for a financial year, the business owner is required to fill form 4562 while filing taxes in order for it to be considered for small business tax reductions.
Depreciation is an important aspect of a business that allows the business owners to recover the cost spent on wear and tear, deterioration and obsolescence of the assets. In addition, it also prevents the overstatement of profits and hence brings about a reduction in taxes.