Depreciation Basics

24 September 2013 / Uncategorized / Comments Off on Depreciation Basics

Welcome to another edition of Tuesday Tidbits. Where we make tax and accounting simple. Today we're gonna talk about depreciation. It's governed by Internal Revenue Code section 167. And basically what depreciation is, is the IRS says you cannot write things off that have a useful life more than one year. So you buy a desk and chair to sit at when you do your work. The IRS has stated that those are seven year assets, and we need to write that purchase price off, in other words, deduct it over the next seven years. Computers, they don't last as long So computers are typically a five year life. Now that really applies to every asset you buy. So, I, as an accountant buy a stapler for $20. If I were to read that IRS rule strictly, that section 167, I'd have to write this off over it's useful life, seven years. It's $16 so that really isn't practical. So what we do in accounting is we say okay we're gonna set up a floor if we buy anything under $300 we're just gonna write it off as office supplies. If we buy something more than $300 or something like a printer or a monitor, that really is a tangible asset, we're gonna go ahead and write that off over five years. One other thing that we can do if we have a lot of income in our company, there is another code section that helps us out. It's code section 179, and what code 179 says is we know we just told you under 167 that you have to write that off over five or seven years. But under 179 you can make an election to write it off immediately. So what's the difference? Why have all the, why have two different code sections? Because if you don't make the election and you just decide to write off assets, the IRS can step in and say no we're not going to allow that deduction, you didn't make the election you lose it, you need to depreciate that over time. So it's really one of those IRS traps that everybody hates. That concludes today's Tuesday Tidbit See you next Tuesday. Widget Bookkeeping & Tax Know More, Keep More