How Do I Record Depreciation Expense?Gwinnett CPA Advises Atlanta Taxpayers: Depreciation Expense Deductions
Properly claiming and recording depreciation expense is a critical component of ensuring that a business claims its lowest legal possible tax. Failure to be keenly sensitive to the many nuance and laws surrounding a business’s proper claiming of depreciation expense can cause both undue tax obligations and potentially the assessment of penalties and interest. Being aware of many of the general guidelines of this perplexing section of tax code can help you avoid potentially unnecessary record-keeping issues and administrative burdens.
"At His CPA PC we work hard to make sure you receive every legal tax deduction your business is entitled to. Tax law allows for the aggressive deduction of fixed assets such as equipment and furniture that you can deduct in full in the year of purchase if you qualify. Be sure you “don’t leave any tax deductions on the table” when preparing your business’s annual income tax return."
— Gwinnett CPA, John Dillard CPA
Fixed assets are items a business owns that have a value to the business beyond a year and are capital in nature (i.e., furniture, equipment, buildings, etc.). All fixed assets, except for land, are legally allowed to be depreciated/amortized over their lives as defined by tax code.
While GAAP (Generally Accepted Accounting Principles) requires a business to depreciate items over their useful lives, which often is different than what tax law requires, tax law is very specific as to the allowable periods and methods of depreciation. A company therefore who has an audit and has financials presented in accordance with GAAP requirements is most likely to have depreciation expense recorded on its books which will be different from that recorded on their income tax return. However many companies who do not have such limitations or who prepare complied financial statements on an income tax basis might wish to track their fixed assets on tax basis for both their returns and compiled financials.
Section 179 depreciation has long existed in tax code allowing businesses to rapidly depreciate the purchase of qualifying fixed assets. Generally speaking this computation would include items such as furniture or equipment but would not include passenger vehicles or commercial and residential real estate. Section 179 by tax law is limited to an annual amount that the business claims as profit. In order for Section 179 depreciation to be valid it is required to be claimed on the original return and cannot be claimed as a new item on an amended return. As tax law also limits the amount of Section 179 depreciation an individual can claim on their personal return to that years statutory amount, due care should be exercised in tax planning especially for those who have investments in multiple "flow through" entities.
Deducting Real Estate
Tax law has long held that real estate is deductible over a dramatically longer period than other fixed assets. The classification of a particular real estate item will determine the length of time to depreciate an item. Generally tax law has long held that commercial real estate has the longest period over which to depreciate. Residential real estate is second. Land, per tax law, is not part of the deductible basis and should not be included in a particular asset’s basis.
The first year of an asset’s depreciation expense is also based upon/limited by the month an item is placed in service. Care should be given in the depreciation of all assets but especially for real estate, since real estate generally will grow in value over time. One may find a large gain on the sale of a depreciated real estate asset, making its tax basis/book value even lower than originally purchased, and therefore the gain higher than perhaps a layman might anticipate.
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