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Asset Depreciation 101: What You Need to Know


Tax season is often a time of dread. Small business owners, however, should look forward to asset depreciation, which represents the decrease in value of an asset but can also qualify as an income tax deduction. Taxpayers can recover some of the costs of certain property over time, according to the IRS. In other words, it's almost like a yearly allowance that represents the reduction in value of the asset. Ensuring you receive the total tax deduction available to you requires a fundamental understanding of how asset depreciation works:

  • Assets that depreciate can be either tangible or intangible. Tangible assets are physical assets, such as company cars and machinery. Intangible assets can include software and copyrights. In order for an item to be counted for depreciation, the taxpayer must own the item, use it for business, and have continued use over one year.
  • Depreciation can be spread out over a number of years, giving businesses tax relief in more than one accounting period. Once the property class of the item to be depreciated has been identified from the item list in IRS Publication 946, find the asset's "placed in service" date. This is the date you started using the asset, but also the date from which asset depreciation begins. Then you can determine the time frame (years) to use for the asset's recovery period (period of time when depreciation can be spread out).
  • Though there are different depreciation systems, the IRS recommends the Modified Accelerated Cost Recovery System (MACRS). With this system in place, you will have to select the most appropriate depreciation method and convention for calculating depreciation on an item. The most common of these is the General Depreciation System (GDS), though you may be required by law to use the Alternative Depreciation System (ADS).
  • Asset depreciation, at its most basic, is a calculation of the asset's initial cost (or other basis for depreciation) multiplied by the percentage used for business. From this figure, subtract any credit or deductions that apply to the asset, including expensed portions or bonus first-year depreciation.
  • Calculating depreciation may seem like a challenging part of small business taxation, but it is simplified by using the tables and worksheets found on the IRS website. One example is the MACRS worksheet, which can help keep your figures organized. Information is set up in a grid formation, including each year of the recovery or depreciation period, followed by the cost, allowed percentage to claim for business depreciation, and the corresponding dollar figure. The rates listed in the MACRS percentage tables will help you determine the basis for depreciation. Take the time to read the instructions and follow the steps carefully. The end result could help your business get the most benefit from this valuable income tax deduction.

For more information on asset depreciation and how to calculate it, visit IRS Publication 946: How to Depreciate Property.


This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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