Which Assets Can't Be Depreciated?

Depreciation is a non-cash expense that businesses use to spread the cost of an asset over its useful life. It reduces the taxable income of a business, which can save money on taxes. However, not all assets can be depreciated. This article will discuss which assets cannot be depreciated and provide examples.

1. Land

Land is not depreciable because it is considered to be a permanent asset. It does not wear out or become obsolete over time. However, the improvements to land, such as buildings and fences, can be depreciated.

2. Inventory

Inventory is not depreciable because it is considered to be a current asset. It is intended to be sold within a year, so it does not have a useful life that can be depreciated over.

3. Prepaid Expenses

Prepaid expenses are not depreciable because they have already been paid for and used up. Examples of prepaid expenses include insurance premiums and rent payments.

4. Goodwill

Goodwill is not depreciable because it is an intangible asset. It represents the value of a business's brand, reputation, and customer relationships. Goodwill is often acquired when one business purchases another business.

5. Organization Costs

Organization costs are not depreciable because they are considered to be a one-time expense. They are incurred when a business is first formed and include things like legal fees and accounting fees.

6. Research and Development Costs

Research and development costs are not depreciable because they are considered to be an expense that is incurred in the hope of creating a new product or process. They are not guaranteed to be successful, so they cannot be depreciated.

7. Start-Up Costs

Start-up costs are not depreciable because they are considered to be an expense that is incurred in the early stages of a business's development. They are not related to the production of income, so they cannot be depreciated.

8. Personal Use Assets

Personal use assets are not depreciable because they are not used in the production of income. Examples of personal use assets include personal vehicles and vacation homes.

9. Depletable Assets

Depletable assets are not depreciated, but they are instead subject to depletion. Depletion is a non-cash expense that reduces the taxable income of a business that is engaged in the extraction of natural resources, such as oil and gas.

10. Intangible Assets

Intangible assets are not depreciated, but they are instead subject to amortization. Amortization is a non-cash expense that reduces the taxable income of a business that has acquired an intangible asset, such as a patent or a copyright.

Conclusion

The assets listed above cannot be depreciated because they do not meet the requirements of the Internal Revenue Service (IRS). The IRS requires that an asset be used in the production of income, have a useful life that can be determined, and be owned by the taxpayer.

If you are not sure whether an asset can be depreciated, you should consult with a tax professional.