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How Can Depreciation Help Me? September 19, 2009

Posted by Julie Duriga, CPA in Uncategorized.
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j0432694Depreciation is one of the most complex areas of accounting and this area is where accountants have the most flexibility as far as reducing tax liability or showing strong net income when it is most needed.  Depreciation affects the income statement and can drastically lower your tax bill. When we depreciate an asset, we are not expensing it all at one time but over a period of 5, 10, or 15 years.  Some assets like buildings are expensed over a period of 27.5 years.

EXAMPLE:  Let’s say you buy a 5,000.00 laptop for your business.  For purposes of depreciation we would say, that this laptop looses its value over 5 years at 1,000.00 per year.  Quite simply, all we do is divide 5,000.00 by 5 years.  Rather than showing a 5,000.00 expense on the income statement right away, we only have 1,000.00 expense per year.

This is beneficial if we are trying to get loans from the bank, this way we have a higher net income.  If we took the entire 5,000.00 and expensed it this year, it would lower our net income but this would also lower our tax bill.  The lower our net income, the lower our tax bill.

Depreciation is an important topic to discuss with your accountant.  Sometimes it is better to put your equipment on a longer time frame, such as the laptop over 10 years…this might help you in later years when you are more profitable to lower your tax bill in the years when you need it the most.

 Visit my website for more tools to help you run your business better.  www.UniversityForBusiness.com

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