What Is Depreciation? A Simple Guide for Business Owners

What Is Depreciation? A Simple Guide for Business Owners

If you’ve ever wondered why your business equipment shows up as a tax deduction year after year—welcome to the world of depreciation. It may sound like accountant-speak, but understanding depreciation can help you make smarter tax and purchasing decisions for your business.

Depreciation is a tax and accounting method that spreads the cost of an asset over its useful life.

Let’s break down how depreciation works for small business assets—without the jargon.

What Is Depreciation?

Depreciation is the process of spreading out the cost of a large asset (like a vehicle, equipment, or machinery) over the time you use it.

Instead of deducting the full cost of that $5,000 computer in the year you buy it, depreciation allows you to deduct a portion of it each year over its useful life.

Why Depreciation Matters

✅ Tax Savings It lowers your taxable income each year the asset is in use.

✅ Accurate Financial Reporting It helps match expenses with the revenue those assets generate.

✅ Cash Flow Management Spread-out deductions can help manage your taxable income consistently year to year.

What Can Be Depreciated?

• Office furniture & fixtures

• Computers & tech equipment

• Vehicles used for business

• Buildings and improvements

• Machinery & tools

📌 Note: Land itself is not depreciable.

How Long Is the Depreciation Period?

The IRS assigns different assets a standard “useful life.” Some common examples:

• Computers: 5 years

• Office furniture: 7 years

• Commercial buildings: 39 years

Your tax preparer or software can help apply the correct timeline.

Methods of Depreciation (Keep It Simple!)

There are several ways to calculate depreciation, but here are two every small business owner should know:

🔹 Straight-Line Method Deduct the same amount each year. This is the most common and straightforward method.

🔹 Section 179 & Bonus Depreciation These let you deduct more (or all) of the cost in the first year, which is great for businesses with high startup or capital expenses.

✅ Pro Tip: You can often choose between spreading depreciation out or taking a large deduction upfront. Talk to your tax professional about what’s best for your cash flow and long-term planning.

Key Notes on Section 179 & Bonus Depreciation

• Section 179 Limit for 2024: Up to $1.22 million in deductions, with a phase-out beginning at $3.05 million in total equipment purchases.

• Assets must be used more than 50% for business and placed in service during the year.

• Bonus Depreciation for 2024: Currently at 60% for qualifying new or used assets. (It began phasing down from 100% in 2023 and is scheduled to sunset unless extended.)

⚠️ Not all assets qualify. Consult your CPA to avoid missteps.

How to Track Depreciation

Bookkeeping software like QuickBooks, Xero, or Wave can help automate depreciation tracking. Still, it’s important to review your depreciation schedule annually with your tax preparer.

Keep records of:

• Purchase date

• Cost of the asset

• Description and use

• Depreciation schedule from your CPA or software

Common Depreciation Mistakes to Avoid

❌ Deducting land as a depreciable asset

❌ Forgetting to depreciate leasehold or capital improvements

❌ Taking Section 179 on assets not placed in service

❌ Not tracking business use percentage (especially for vehicles)

Final Thoughts

Understanding depreciation helps you get the maximum tax benefit from the investments you make in your business. You don’t have to master all the math—just know the basics, keep accurate records, and get advice when you need it.

📞 Need help applying depreciation to your financials or tax return?KB2 Bookkeeping & Tax is here to make it simple. Reach out today so you’re not leaving deductions on the table! 💼💸