Which Asset Cannot Be Depreciated?

Depreciation is a non-cash expense that businesses can deduct from their taxable income. It is a way of spreading the cost of an asset over its useful life. However, not all assets can be depreciated.

Assets that cannot be depreciated include:

• Land
• Inventory
• Personal use assets
• Intangible assets with an indefinite useful life

Land

Land is not depreciable because it is considered to have an indefinite useful life. This means that it will never wear out or become obsolete.

Inventory

Inventory is not depreciable because it is intended to be sold within a short period of time. Inventory is typically sold within one year.

Personal use assets

Personal use assets are not depreciable because they are not used for business purposes. Personal use assets include items such as cars, boats, and vacation homes.

Intangible assets with an indefinite useful life

Intangible assets with an indefinite useful life are not depreciable because it is difficult to determine how long they will last. Intangible assets with an indefinite useful life include items such as goodwill, trademarks, and copyrights.

Why Depreciate Assets?

There are several benefits to depreciating assets. Depreciation can help businesses:

• Reduce their taxable income. Depreciation is a non-cash expense, which means that it does not reduce a business's cash flow. However, depreciation does reduce a business's taxable income, which can save the business money on taxes.
• Spread the cost of an asset over its useful life. Depreciation allows businesses to spread the cost of an asset over its useful life. This can help businesses avoid having to pay for the entire cost of an asset all at once.
• Plan for the replacement of an asset. Depreciation can help businesses plan for the replacement of an asset. By depreciating an asset over its useful life, businesses can create a fund to use for the purchase of a new asset.

How to Depreciate Assets

Depreciation is calculated using a variety of methods. The most common method is the straight-line method. The straight-line method calculates depreciation by dividing the cost of an asset by its useful life.

For example, if a business purchases a computer for $1,000 and the computer has a useful life of five years, the business would depreciate the computer by $200 per year ($1,000 / 5 years = $200).

Common Mistakes to Avoid

There are several common mistakes that businesses make when depreciating assets. These mistakes include:

• Depreciating assets that cannot be depreciated. Businesses should only depreciate assets that are eligible for depreciation. Depreciating assets that cannot be depreciated can lead to the overstatement of expenses and the understatement of taxable income.
• Depreciating assets over too short a useful life. Businesses should depreciate assets over their actual useful life. Depreciating assets over too short a useful life can lead to the overstatement of expenses and the understatement of taxable income.
• Depreciating assets over too long a useful life. Businesses should depreciate assets over their actual useful life. Depreciating assets over too long a useful life can lead to the understatement of expenses and the overstatement of taxable income.

Conclusion

Depreciation is a valuable tax deduction that can help businesses save money on taxes. However, it is important to understand the rules for depreciation in order to avoid making mistakes.

Additional Information

• IRS Publication 946: How to Depreciate Property
• Depreciation Methods
• Common Depreciation Mistakes