Understanding Depreciation

November 8, 2023

When we talk about exciting things in the world of tax. Depreciation and amortization are not usually one of them. You have to be a pretty yacked out accountant to get excited about depreciation unless you fully understand why it can be so exciting. Let me dive into it a little bit.

We see a lot of tax returns come across our desks that were prepared by other accountants who may not fully understand an industry or understand what people are buying. One of my biggest pet peeves is I see improvements listed on a depreciation schedule or equipment. It’s really important that you have detailed documentation about what you’ve purchased so that when you sell it or dispose of it, you can get rid of it and reap the tax benefit if there is one at that point.

You’ll always wanna keep your depreciation schedule, detailed and clean because it’s also a basis for paying property taxes in a lot of places that have business personal property taxes. So it’s crucial to the operation of the business. Although most people don’t really give it a whole lot of thought. When I look at a depreciation schedule, I’m looking for money for you. What are cases that have been written on that depreciation schedule that shouldn’t be that way that may be costing you money?

I’ll give you a really good example. I often see furniture and fixtures, equipment, improvements. And many times they are depreciated for too long of a timeframe. I’ll see somebody list a computer for example, which should be depreciated as equipment over five years. But haven’t listed for seven years, or may see, a piece of commercial property that is listed for 39 years, which should only be five or maybe even fully expensed in the year it was purchased.

Depreciation is really a pretty important topic. So what do you do if your depreciation schedule is wrong? Well, we file catch up depreciation. And that means that if a piece of equipment was depreciated, say over 39 years, and it should have only been over five years.

We can take the depreciation that should have been claimed in prior years and deducted all in one period in a catch up depreciation calculation and show it specifically that way on the tax return. That way we catch everything up in one year and you eliminate the pain of dragging that asset around for 39 years when it really shouldn’t be there.

Also, we see a lot of cases where some people have thought that they don’t want to depreciate something because they don’t wanna pay taxes on it when they sell it. Most of the time, I see this on residential rental properties or even commercial properties. They may have heard that if they don’t depreciate it, they don’t have to calculate the gain, and the gain won’t be as large when they sell it. That is completely false. Let’s take that off the table.

The tax law says when you calculate a gainer loss on a sale of a piece of property, you use the depreciation that should have been taken, not how much was actually taken. So that means if you did not depreciate it, you lose out on the deduction of the depreciation expense for the years when you should taken it. We don’t want that to happen. Depreciation can really be an area where we can hone our skills to make sure that you’re capturing all of the expenses possible as quickly as possible when you make investments into larger items for your business.

So please have a look at your depreciation schedule and see if you can narrow down those things that may have generic descriptions to decide what they actually were so that we can determine if they’re depreciated properly. This could be worth a lot of money in a lot of cases.

I’m Donna Bordeaux with PYOPAccounting.com. Please follow us on Facebook and Instagram. Make sure you check out our blog and our website from the link below. Subscribe to our YouTube channel and hit the bell to be notified when we post. To contact me, email me at donna@pyopaccounting.com.

Donna Bordeaux, CPA with PYOPAccounting.com

Creativity and CPAs don’t generally go together.  Most people think of CPAs as nerdy accountants who can’t talk with people.  Well, it’s time to break that stereotype.  Lively, friendly, and knowledgeable can be a part of your relationship with your CPA as demonstrated by Donna and Chad Bordeaux.  They have over 50 years of combined experience as entrepreneurial CPAs.  They’ve owned businesses and helped business owners exceed their wildest dreams.   They have been able to help businesses earn many times more profit than the average business in the same industry and are passionate about helping industries that help families build great memories.