Assets That Cannot Be Depreciated

Depreciation is a way of spreading the cost of an asset over its useful life. This reduces the taxable income of a business and can help to defer taxes. However, not all assets can be depreciated.

Assets That Qualify for Depreciation

In order to qualify for depreciation, an asset must meet the following criteria:

• It must be used in a trade or business.
• It must have a useful life of more than one year.
• It must be property that is subject to wear and tear or obsolescence.

Assets That Cannot Be Depreciated

There are a number of assets that do not meet the criteria for depreciation. These include:

• Land Land is not subject to wear and tear or obsolescence, so it cannot be depreciated.
• Inventory Inventory is not used in a trade or business, so it cannot be depreciated.
• Personal-use assets Personal-use assets are not used in a trade or business, so they cannot be depreciated.
• Intangible assets Intangible assets, such as goodwill and patents, are not subject to wear and tear or obsolescence, so they cannot be depreciated.

Special Rules for Certain Assets

There are a few special rules that apply to certain assets. These include:

• Depreciation of buildings and other real property Buildings and other real property can be depreciated over a period of 27.5 years.
• Depreciation of cars and other vehicles Cars and other vehicles can be depreciated over a period of 5 years.
• Depreciation of computers and other equipment Computers and other equipment can be depreciated over a period of 7 years.

Benefits of Depreciation

Depreciation can provide a number of benefits for businesses, including:

• Reduced taxable income Depreciation reduces the taxable income of a business, which can save money on taxes.
• Deferred taxes Depreciation can help to defer taxes by allowing businesses to spread the cost of an asset over its useful life.
• Increased cash flow Depreciation can increase cash flow by reducing the amount of taxes that a business has to pay.

Strategies for Maximizing Depreciation Benefits

There are a number of strategies that businesses can use to maximize the benefits of depreciation. These include:

• Choosing the right depreciation method There are several different depreciation methods available. Businesses should choose the method that will provide the greatest tax savings.
• Taking advantage of bonus depreciation Bonus depreciation allows businesses to deduct a larger portion of the cost of an asset in the year it is placed in service.
• Section 179 expensing Section 179 expensing allows businesses to deduct the entire cost of certain assets in the year they are placed in service.

Common Mistakes to Avoid

There are a number of common mistakes that businesses make when it comes to depreciation. These include:

• Not depreciating assets that qualify Businesses should depreciate all assets that meet the criteria for depreciation.
• Depreciating assets over too short a period of time Businesses should depreciate assets over their useful lives. Depreciating assets over too short a period of time can result in higher taxes.
• Not taking advantage of bonus depreciation and Section 179 expensing Businesses should take advantage of bonus depreciation and Section 179 expensing to maximize tax savings.

Conclusion

Depreciation can be a valuable tax-saving tool for businesses. By understanding the rules for depreciation and using the right strategies, businesses can maximize the benefits of depreciation.

Tables

Table 1: Assets That Qualify for Depreciation

Table 2: Assets That Cannot Be Depreciated

Table 3: Depreciation Methods

Table 4: Common Depreciation Mistakes