When do you depreciate an asset?
submitted by n8_smo

Vic

It has to be a physical item (not software). It needs to cost more than $300 and last longer than a year.

Dr. Dave

The item cannot be inventory for selling, but an asset for company use.

Arnold

If an asset wears out, i.e. trucks, buildings, tools, it is subject to depreciation. Land, on the other hand, does not wear out, so it cannot be depreciated.

Iggi

Depreciating an asset isn't necessary, but it's better for the company. Your books will reflect a more accurate picture of your assets if you use depreciation, which helps with your taxes.

If you buy a work truck for $20k, it won't always be worth $20k. In ten years, it might be work $6k, and you wouldn't want your books to be showing a $20k truck. Without depreciating that asset, your books will overstate the value.

telly

One thing I'd like to add is that depreciation isn't just about tax benefits or measuring the true value of assets. It also helps in planning for future expenses. Like if you know your truck is going to lose value over time, depreciation gives you an idea of when you might need to replace it. That way you can set aside funds for repairs. It's like giving your financial statements a more realistic view of your company's resources.

Related:
Why is it necessary to account for depreciation?
Different methods of depreciation

Kev Smith

Depreciation applies only to tangible fixed assets that have a limited useful life. Things like land are not depreciable because it doesn’t wear out or get used up, other assets like machinery, computers, or furniture will definitely depreciate.

You'd want to choose your method of depreciation based on how the thing wears out over time. If it's well maintained, maybe straight line is the best method.

Another point is that depreciation isn’t just an accounting trick. It can have real impact on a business’s cash flow and profitability. For example, claiming depreciation deductions reduces taxable income. Paying less in taxes is an immediate benefit to your bottom line.

If you're a newer business and you want to maximize your deductions early on, you can use an accelerated method so it's depreciated faster on the books.