Depreciation

Here’s a cute joke about our topic for the day:  What do accountants suffer from that ordinary people don’t? Depreciation.

The definition of depreciation according to Webster’s Dictionary is:

1: A reduction in value, writing down the capital value of an asset over a period of time in a company’s accounts. Source: European Union.

2: The decline in the value of a capital asset. Depreciation represents a cost of ownership and the consumption of an asset’s useful life.

3: The decrease in the service potential of property as a result of wear, deterioration, or obsolescence, and the subsequent allowance made for the process in the accounting records of the activity.

4: The difference between the acquisition cost of a motor vehicle and any disposal proceeds.

Despite the bad news about things you buy going dowin in value, there is some good news .You can get back some or all of what you paid for property through tax deductions if you use your property to produce income. Often taxpayers get confused with depreciation deductions since they are not paid with cash like mortgage payments.  Taxpayers should also be aware that the deductions for depreciation most times have no correlation to mortgage payments as each payment consists of deductible interest expense and non-deductible principal reduction.

Another point about depreciation expense that taxpayers dislike is that it only applies to assets used in active trade or business, or as rental property. Depreciation on things like personal use automobiles and improvements to your home don’t create any tax savings.

If you’d like to know more about depreciation and how it isn’t as bad as it sounds, contact our office.  Our staff can explain how you can use depreciation to your benefit and how it may also effect things like tax paid on gain when you sell an asset.

David W Huff, CPA, PFS, MS is a partner at Person CPA Group. He provides clients with tax preparation and consulting services, accounting services, retirement plan and benefit consulting, accounting software technical support and training, and management advisory services. His specialty is helping new businesses organize their operations to maximize tax savings and move quickly from start-up to profitability.  You can reach David by email at: david@personhuffcpa.com