Depreciating vs. Expensing Purchases on Income Taxes

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The Internal Revenue Code offers some tax breaks to business owners who must frequently make purchases in order to keep their enterprises up and running. You can either depreciate or expense these costs when you prepare your tax return. 

The general rule is that you can write off your daily operating business purchases, such as office supplies or mileage on your business vehicle, as expenses. This involves subtracting them from your gross, overall income so you pay taxes on less income in that year. 

Purchases of long-term business assets, such as factories and equipment, are claimed as depreciation. This involves subtracting a percentage of their cost per tax return over a period of years.

Key Takeaways

  • Expensing a purchase allows you to claim the entire cost in the first year, whereas depreciating the expense means claiming the cost over a period of years.
  • The IRS has numerous rules for which business purchases can fall into either category.
  • Depreciable expenses typically involve the purchase of long-term assets that require a significant investment.
  • Section 179 of the Internal Revenue Code allows a business to deduct up to $1,050,000 of the total cost of capital assets in full as of 2022, subject to certain limitations and qualifications.

Claiming Expenses on Schedule C

Expensing purchases requires filing Schedule C with your tax return, and Schedule C provides an excellent guide to the daily operating expenses that your business can deduct, subject to certain rules. Part I of the schedule details all your sources of income. Part II lists the expenses you can potentially claim and subtract from your total gross income. The result is your taxable income.

The operating expenses that the IRS lists on the schedule as being deductible include:

  • Advertising
  • Car and Truck Expenses
  • Commissions and Fees
  • Contract Labor
  • Depletion
  • Depreciation (transferred from Federal Tax Form 4562)
  • Employee Benefit Programs
  • Insurance (other than health)
  • Interest on Mortgages or Other Interest
  • Legal and Professional Services
  • Office Expense
  • Pension and Profit-Sharing Plans
  • Rent or Lease (Vehicles, Machinery, Property)
  • Repairs and Maintenance
  • Supplies
  • Taxes and Licenses
  • Travel, Meals, and Entertainment
  • Utilities
  • Wages 

The IRS cautions that expenses must be ordinary and necessary to the operation of your business in order for them to be deductible on Schedule C. They must also be reasonable and directly related to the business. 

An Example of the Ordinary and Necessary Rule

The exclusion of expenses that aren’t "necessary and ordinary" prevents a taxpayer who's in a budget-oriented business, such as car leasing, from buying a pleasure boat and expensing its maintenance and operations costs. The company's clients are relatively low-income persons looking primarily at price as the criterion for leasing the car. It's unlikely that the company would be taking them on pleasure cruises in the ordinary course of business.


The argument that this kind of entertainment expense was necessary to gain favor with its wealthy clients might be defensible if the company were a very high-end leasing company, one that leased the most expensive cars and other recreational vehicles, including boats.

The Reasonable and Related Rule 

The other limitation on these expenses is that they must be "reasonable" and directly "related" to your business. It probably wouldn’t be considered reasonable for the budget-oriented leasing company to expense maintenance expenses on a boat its customers would probably never see.

The boat has no direct relationship to the business of a budget-oriented car leasing company, but it could be directly related to selling a high-end client on the pleasures of a yacht lease. 

Depreciating Long-Term Purchases

Depreciation is subject to some rules as well:

  • You must own the property.
  • You must use it in a business or income-producing activity.
  • It must have a determinable useful life of more than one year.

The property can’t be “excepted.” This includes “certain intangible property, certain term interests, equipment used to build capital improvements, and property placed in service and disposed of in the same year,” according to the IRS.

The Section 179 Exception 

Section 179 depreciation allows a business to deduct up to $1,050,000 of the total cost of capital assets in full as of 2022, but limitations and qualifications apply. The most important requirement is that the decision to expense rather than depreciate must be made in the year the item is put into service.


You can claim this tax perk by filing IRS Form 4562 with your tax return. 

Expensing vs. Depreciating Expenses

It's generally better to expense an item rather than depreciate it because money has a time value. You get the deduction in the current tax year when you expense it. You can use the money that the expense deduction has freed from taxes in the current year. 

If you choose to depreciate, it may take several years before you receive the full tax benefit of the series of annual depreciation deductions.

Frequently Asked Questions (FAQs)

How do you write off business expenses?

Writing off business expenses requires filing Schedule C with your tax return. The IRS publishes Schedule C instructions to guide you through the rules.

How do you calculate depreciation expense?

Calculating depreciation depends on when you placed the asset in service. Use the Accelerated Cost Recovery System (ACRS) for assets you acquired before 1987. Use the Modified Accelerated Cost Recovery System (MACRS) if you placed the asset in service after 1986.

Updated by Beverly Bird
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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.
  1. Internal Revenue Service. "Schedule C Profit or Loss From Business.”

  2. Internal Revenue Service. "Publication 535, Business Expenses."

  3. Internal Revenue Service. “Topic No. 704 Depreciation.”

  4. Internal Revenue Service. "Instructions for Form 4562.”

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