What Should You Depreciate?

One of the most common questions I am asked has to do with fixed assets and depreciation.  A great example came from a client I was working with a couple months ago.   This client had recently purchased a small business and in doing so had purchased several new items such as: a new computer, new software, a new printer, and a new desk chair. The question that my client asked me was this: "Which of these items CAN/SHOULD I depreciate?" He then told me that he wanted to depreciate as many of the items as possible using the most accelerated depreciation method possible to save the most money as soon as possible.

Like many new business owners, he assumed that depreciating as many items as possible would save him money. This is not 100% true. The reason for depreciating items is to write off the "depreciated"or "used up" amount of that asset each year. The lifetime of a fixed asset varies depending on what type of asset it is.  In order to depreciate an asset it has to have a "service life" of greater than one year.  There is another factor that should be considered when depreciating assets- and that is the purchase cost of the asset. Every company should have a fixed asset threshold that determines which assets are expensed and which items are not.

In this particular situation every item that my client had purchased had a service life of longer than one year so he assumed that everything should be depreciated.    The items ranged in value from $75-$400.  I told my client that we needed to come up with a threshold to base which assets would be depreciated and which items would be expensed.   We decided on a threshold of $250.  I then proceeded to transfer the items under $250 (software, printer, and chair) from the asset account "Office Equipment" into the expense account "Office Equipment Expense".  This worried my client since he thought he would save more money depreciating everything.  The truth is, the more you can expense the more you save.  The reason is simple.  Lets say the software, printer, and chair totaled $500 .  If he had used the straight-line depreciation method for these assets  ( with a useful life of five years and a salvage value of zero) he would have been able to write off $100 that first year ($100/year for five years).  If he expensed the items he would be able to write off the entire $500 that first year.  Once my client understood the difference between expensing items and depreciating them he was more than happy to expense those items under $250.

The lesson here is simple: 

1. You should ONLY depreciate what you have to; and

2. When in doubt ALWAYS ask a professional.  When it comes to tax write-offs you want to be really careful and always double check with a professional.