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Understanding Depreciation: A Key to Business Growth

Depreciation represents the contribution an asset makes to your business over time. When a business buys a building and uses it for several years, it’s not practical to expense the entire cost in the acquisition year. Instead, depreciation allows you to spread this cost over the asset’s useful life.

Why Depreciation Matters

Depreciation is essential for financial accuracy, aligning expenses with the revenue they generate. This method provides a clearer picture of your business’s financial health and performance, aiding in future expense prediction and cash flow management. For instance, a $5,000 computer expected to last five years can be depreciated at $1,000 annually.

What Can Be Depreciated?

Assets like machinery, equipment, buildings, vehicles, and furniture are commonly depreciated. However, land cannot be depreciated. For federal tax benefits, the IRS requires that the asset must be owned, used for business, have a determinable useful life, and last more than a year.

Depreciation Methods

Choosing the right depreciation method depends on the asset type and business needs. The straight-line method divides the asset’s cost by its useful life, while accelerated methods like double-declining balance front-load depreciation expenses.

Special Depreciation Rules

  • Section 179: Allows immediate deduction of an asset’s full cost, up to a limit.
  • Bonus Depreciation: Provides an upfront deduction, phasing out by 2027.

Accurate tracking and reporting of depreciation ensure compliance with tax regulations and help in making informed financial decisions. For more detailed insights, read the full article here.

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