Building Your Business Business Taxes How Depreciation Benefits Your Business By Jean Murray Updated on September 19, 2022 Fact checked by Mrinalini Krishna In This Article View All In This Article What Is Depreciation? Accelerated Depreciation Accelerated Depreciation Benefits When to Take Depreciation The IRS and Depreciation Frequently Asked Question (FAQs) Photo: 10'000 Hours / Getty Images Most business expenses are deductible because they are an ordinary and necessary business expense. You spend money for an item in the current year and you get a deduction for that expense in that year. For example, you buy office supplies for $200 and you get an ordinary and necessary business tax deduction for those $200 of supplies because you spent money on it in the current year. Key Takeaways Depreciation is a tax benefit on account of wear and tear of business assetYou can claim depreciation for a business asset over the course of its useful life or take accelerated depreciation for eligible assetsClaiming depreciation over the course of an asset's life can give you a tax benefit in a year where you didn't spend any money on buying that asset What Is Depreciation? Depreciation is something that you can get a deduction for in the current year even though you might not have spent money to buy it in that year. For instance, you bought a computer system in 2017 for $5,000. The life of a computer is 5 years, so you will get a write-off the $5,000 over the next five years (taking the expense to reduce your business taxes). Even though in 2019 you did not spend any cash for the computer (since you bought it for cash) you will get a deduction for that computer you bought in 2017 since it is being written off over 5 years starting in 2017 when you purchased it. Therefore, in 2019, you get a deduction for a non-cash expense. Note Depreciating assets can give you more income on your profit and loss statement and increase your assets on your balance sheet. For example, the computer you bought in 2017 for $5,000 less the depreciation of $1,000 taken in 2017 leaves a net income of $4,000 and increases your assets on your balance sheet by the same $4,000. Any third party looking at a business’ financial statements likes to see increased net income and an increase in assets over liabilities. Accelerated Depreciation and How It Applies to Specific Products When you depreciate, or "write off," an asset over its useful life, you can take more depreciation in the initial years with accelerated depreciation. Depreciation on purchases of business assets can be accelerated, allowing you to deduct more of the purchase price earlier, sometimes entirely in the first year. Each class of assets has a life and table that specifies the amount of accelerated depreciation you are entitled to each year (your CPA can show you this table). You can also make an election under Section 179 to take all of the depreciation in the year of purchase, and you may also be eligible to take a bonus depreciation deduction for purchasing new assets. The Benefits of Accelerated Depreciation The benefit of accelerated depreciation is that you are getting more of a tax deduction in earlier years and therefore you get a return of more of your tax money earlier versus later. It is important to realize that depreciation is not now or never... it is now or later. And sometimes taking the deduction in later years is better. Note If you expect to be in a higher income bracket in later years, it would not be in your best interest to accelerate the deduction but instead to write off the asset utilizing the straight-line method (that is, an equal amount of depreciation every year); therefore saving the deduction for the years you are in a higher tax bracket. You must keep a copy of the invoice that shows exactly what you purchased plus proof of payment. Many states will check business assets you purchase to make sure you paid the applicable sales taxon the asset. Even if you bought the asset in another state, you must pay use tax to your state if sales tax was not charged. When to Take Depreciation You take the depreciation expense at the end of the year, so it can be included in your taxes. But knowing when to take how much depreciation over the life of the asset, that is the million dollar question. Note The choices are to take the depreciation all in the year of purchase (under Section 179) or take the depreciation over the life of the asset, with an option of accelerating the depreciation deduction to the earlier years of purchase. Careful tax planning will tell you which option is most beneficial for you depending on your projected tax bracket each year and anticipation of changes in the tax law. Consult with your tax professional to help you determine depreciation deductions for specific business assets. The determination of the depreciation method that will work best for you can be time-consuming; however, the benefits of taking the depreciation deduction in the years that most benefit your financial statements and tax returns are worth the effort. Having a first-rate CPA on your team is always important. The IRS and Depreciation Taking tax deductions on the purchase of business assets is more complex than you might think. While depreciation can prove to be very useful to you as a business owner, the IRS imposes limitations and restrictions on the amount and type of depreciation you can take on business assets. Its probably a good idea to enlist the help of a tax professional to help navigate the rules and ensure you're using depreciation to the best advantage for your business. Frequently Asked Question (FAQs) Why would a business select an accelerated depreciation method of depreciation for tax purposes? Accelerated depreciation can help businesses take larger deductions on qualified business expenses. In effect, accelerated depreciation front-loads the deductions in the earlier part of the investment, and acts as a tax subsidy for businesses. What is depreciation in business? Depreciation is a tax benefit that business owners can claim to allow for wear and tear of business assets. You can, typically, either depreciate a business asset over the course of its life or claim accelerated depreciation for eligible assets. Businesses can only claim depreciation for assets used in their business and not for personal property. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Internal Revenue Service. "Topic No. 704 Depreciation." Center for American Progress. "Accelerated Depreciation." Internal Revenue Service. "Publication 946 (2021), How To Depreciate Property - Straight Line Method." Internal Revenue Service. "Depreciation Reminders," Page 2.