{"id":6176,"date":"2024-07-17T08:27:39","date_gmt":"2024-07-17T13:27:39","guid":{"rendered":"https:\/\/www.incsight.net\/?p=6176"},"modified":"2025-10-31T18:18:55","modified_gmt":"2025-10-31T23:18:55","slug":"what-is-depreciation-for-my-business-when-does-a-capitalization-policy-make-sense-3","status":"publish","type":"post","link":"https:\/\/www.incsight.net\/blog\/2024\/07\/17\/what-is-depreciation-for-my-business-when-does-a-capitalization-policy-make-sense-3\/","title":{"rendered":"What Is Depreciation for My Business? When Does a Capitalization Policy Make Sense?"},"content":{"rendered":"<div class=\"et_d4_element et_pb_section et_pb_section_0  et_pb_css_mix_blend_mode et_section_regular et_block_section\" >\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t<div class=\"et_d4_element et_pb_row et_pb_row_0  et_pb_css_mix_blend_mode et_block_row\">\n\t\t\t\t<div class=\"et_d4_element et_pb_column_4_4 et_pb_column et_pb_column_0  et_pb_css_mix_blend_mode et-last-child et_block_column\">\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t<div class=\"et_pb_module et_d4_element et_pb_text et_pb_text_0  et_pb_text_align_left et_pb_bg_layout_light\">\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t<div class=\"et_pb_text_inner\"><p>Depreciation... one word that can make a business owner (and even many accountants) cringe.<\/p>\n<p>However, understanding it and how to implement it correctly in your business can make a big impact. That is exactly what I will be talking about here.<\/p>\n<h1>What Is Depreciation?<\/h1>\n<p>At a very basic level, depreciation is simply\u00a0the process of spreading out the expense for an asset purchase over time. When you buy\u00a0personal property (such as a car, computer, or other equipment) or real property (such as a building) you have\u00a0a few possible options for deducting that cost.<\/p>\n<p>The kinds of property that you can depreciate include machinery, equipment, buildings, vehicles, furniture, etc.<\/p>\n<p>You can't claim depreciation on property held for personal purposes. If you use property, such as a car, for both business or investment and personal purposes, you can depreciate only the business or investment use portion.<\/p>\n<p>Land is never depreciable, although buildings and certain land improvements may be.<\/p>\n<p>Purchases not expected to last more than one year you would simply expense immediately.<\/p>\n<h1>What Options Do You Have for Deducting Asset Purchases?<\/h1>\n<ul>\n<li><strong>Regular Depreciation:<\/strong> Can take anywhere from 3 to 39 years, depending on the type of asset purchased.<\/li>\n<li><strong>Bonus Depreciation:<\/strong> Allows you to deduct\u00a0a percentage of the cost of personal property upfront.\n<ul>\n<li>2022: 100%<\/li>\n<li>2023: 80%<\/li>\n<li>2024: 60%<\/li>\n<li>2025: 40%<\/li>\n<li>2026: 20%<\/li>\n<li>2027: 0%<\/li>\n<\/ul>\n<\/li>\n<li><strong>Section 179 Expensing:<\/strong> Allows you to deduct up to $1,220,000 (2024) of the cost of personal property in one year.<\/li>\n<\/ul>\n<h1>What Is a Basic Example of Depreciation?<\/h1>\n<p>Lets imagine you purchased a brand new computer for $4,500 on January 12, here is how it would work.<\/p>\n<p>With<strong> Regular Depreciation<\/strong><span>, a computer is considered a 5 year asset so your $4,500 purchase would be spread out across 5 years. <\/span><\/p>\n<p><span>With\u00a0<strong>Bonus Depreciation <\/strong>or<strong> Section 179\u00a0<\/strong>you would potentially be able to deduct the full $4,500 in year 1.<\/span><\/p>\n<h1><span>What are the Rules Around Depreciation?<\/span><\/h1>\n<p><span><strong>Rule #1: You Must Be In Business<\/strong><\/span><\/p>\n<ul>\n<li><span>If you just have property that\u00a0is simply for personal use, it is not deductible.<\/span><\/li>\n<li>If you purchase an asset with the intent of opening a new business, no depreciation would be allowed until your business <em><strong>actually<\/strong><\/em> begins. This doesn't necessarily mean you need to have revenue coming in or be profitable but you need to be operating as a \"going concern\".<\/li>\n<\/ul>\n<p><span><strong>Rule #2: Depreciation Begins When You Place Property In Service<\/strong><\/span><\/p>\n<ul>\n<li>You don\u2019t have to use the property to place it in service, but the property must be available for use in your active business.<span>\u00a0<\/span><\/li>\n<li><span>Example 1:<\/span> You purchase a computer for your business on December 15th but then send it back in to get software and everything else loaded onto it so you can actually use it and you get it back ready to use on January 10th.\n<ul>\n<li>This would be considered placed in service on January 10th, not December 15th.<\/li>\n<li>If the computer came ready to use right away then December 15th would be the date in service.<\/li>\n<\/ul>\n<\/li>\n<li><span>Example 2:<\/span> Rental property would be considered placed in service the day it is ready for occupancy and listed for rent but would not have to be physically rent to be considered in service.<\/li>\n<\/ul>\n<h1>When Does Depreciation Begin?<\/h1>\n<ul>\n<li><strong>Bonus Depreciation or Section 179:<span>\u00a0<\/span><\/strong><span>You get a full deduction for the year you place the property in service,\u00a0regardless\u00a0of the month it was placed in service.<\/span><\/li>\n<li><strong>Regular Depreciation:<\/strong><span>\u00a0You must apply rules called conventions to determine the month in which your depreciation deduction begins. The earlier in the year, the larger your deduction for the first year.<\/span><\/li>\n<\/ul>\n<h1><span>What Happens If I Sell a Depreciated Asset?<\/span><\/h1>\n<p><span>If you sell a depreciated asset you may have a gain or loss on the sale. First you need to find out your basis which in simple terms would be your purchase price less any depreciation. Then your gain or loss would be your sale price minus your basis. Here's a quick example:<\/span><\/p>\n<ul>\n<li><span>Purchased Computer for $4,500<\/span><\/li>\n<li><span>Took Full $4,500 Bonus Depreciation in Year 1\u00a0<\/span><\/li>\n<li><span>Sell for $2,000 in Year 3<\/span><\/li>\n<\/ul>\n<p><span>Your basis would be $0 ($4,500 Purchase Price - $4,500 Depreciation) so your gain would be $2,000 ($2,000 Sales Price - $0 Basis), which would be taxable. This is often times referred to depreciation recapture.<\/span><\/p>\n<p><span>In that same example if you only had depreciated $1,500 instead, then your basis would be $3,000 and you would actually have a $1,000 loss ($3,000 Basis - $2,000 Sale Price).<\/span><\/p>\n<h1><span>What Is a Capitalization Policy and Should I Implement One?<\/span><\/h1>\n<p><span>Setting up a capitalization policy allows\u00a0you to immediately\u00a0expense items under $2,500 without having to even worry about depreciation. The IRS refers to this as a \"safe harbor\" which basically means they will accept your expensing of a qualified asset if you property abide by the rules of the safe harbor.<\/span><\/p>\n<p><span>This is something that ever business should take advantage of.<\/span><\/p>\n<ul>\n<li>It is superior to Section 179 expensing because you don\u2019t have the recapture period that can complicate your taxes.<\/li>\n<li>It takes depreciation out of the equation<span>, instead you get a full expense in year 1 just like as if you purchased pens and paper.<\/span><\/li>\n<li>It\u00a0simplifies your tax and business records because you don\u2019t have the assets cluttering your books.<\/li>\n<\/ul>\n<p>Lets go through an example. Lets imagine you bought two new desks for $4,400 ($2,200 each). If you did not use the safe harbor you would need to capitalize and depreciate each desk and keep them on your books as an asset. With a safe harbor you would simply expense them immediately as \"office expenses\" which makes your life much easier.<\/p>\n<p>To take advantage of this safe harbor you need to:<\/p>\n<ol>\n<li><strong>Have a Capitalization Policy in Place<\/strong>\n<ul>\n<li>This needs to be done at the beginning of the year.<\/li>\n<li>Must indicate expensing allowed up to the $2,500 IRS safe harbor limit. <em>Note: You can choose a lower number should you wish but $2,500 is the max.<\/em><\/li>\n<li>You must follow your policy for all asset purchases that meet the thresholds, you cannot pick and choose some to depreciate.<\/li>\n<li>Be sure to keep invoices on file. This is especially important if you have multiple asset purchases on one payment.\u00a0In the example above you'll want the invoice to prove it was two purchases at $2,200 and not one at $4,400.<\/li>\n<\/ul>\n<\/li>\n<li><strong>Make an Election on Your Tax Return<\/strong>\n<ul>\n<li>When you file your tax return you will want to make an election for you to use the safe harbor expensing which is simply a statement you will want to include with the filing.<\/li>\n<\/ul>\n<\/li>\n<\/ol>\n<p>As part of\u00a0<a href=\"https:\/\/taxelm.com\/\" target=\"_blank\" rel=\"noopener noreferrer\">TaxElm<\/a> we have a sample capitalization policy document you can use to put in your internal records.<\/p>\n<h1><span>Summary<\/span><\/h1>\n<ul>\n<li><span>Depreciation cannot begin until you have an active business.<\/span><\/li>\n<li><span>Depreciation for business property in an active business can only begin once the property is placed in service (available for use in the business).<\/span><\/li>\n<li><span>If you use property for both business and personal purposes, you can depreciate only the business use portion.<\/span><\/li>\n<li><span>Implement a capitalization policy in your business to take advantage of the IRS safe harbor so you can immediately\u00a0expense asset purchases\u00a0under $2,500 without having to worry about <\/span><\/li>\n<\/ul><\/div>\n\t\t\t<\/div><div class=\"et_pb_module et_d4_element et_pb_code et_pb_code_0\">\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t<div class=\"et_pb_code_inner\"><iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/INUApejxaCI?si=-fVtXK0oh9VqDK3l\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe><\/div>\n\t\t\t<\/div><div class=\"et_pb_module et_d4_element et_pb_code et_pb_code_1\">\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t<div class=\"et_pb_code_inner\"><iframe src=\"https:\/\/www.buzzsprout.com\/1837660\/13612980-maximizing-tax-savings-with-depreciation-and-capitalization-policies-for-small-business-owners?client_source=small_player&iframe=true&referrer=https:\/\/www.buzzsprout.com\/1837660\/13612980-maximizing-tax-savings-with-depreciation-and-capitalization-policies-for-small-business-owners.js?container_id=buzzsprout-player-13612980&player=small\" loading=\"lazy\" width=\"100%\" height=\"200\" frameborder=\"0\" scrolling=\"no\" title=\"Small Business Tax Savings Podcast, Maximizing Tax Savings with Depreciation and Capitalization Policies for Small Business Owners\"><\/iframe><\/div>\n\t\t\t<\/div><div class=\"et_pb_with_border et_pb_module et_d4_element et_pb_text et_pb_text_1  et_pb_text_align_left et_pb_bg_layout_light\">\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t<div class=\"et_pb_text_inner\"><ul>\n<li style=\"list-style-type: none;\">\n<p><strong>The Time Is NOW To Start Paying Less In Taxes.\u00a0<\/strong><strong>Join <span>TaxElm<\/span> and start eliminating taxes and growing your wealth!<\/strong><\/p>\n<p>What you'll get:<\/p>\n<ul>\n<li><strong>Tax Savings Blueprint and Training:<\/strong> We\u2019ll provide you with a customized tax plan that is tailored to meet your specific needs and goals. Along with that, you have access to our library of training modules, implementation guides, supporting documents, and more.<\/li>\n<li><strong>Unlimited Access to Tax Experts:<\/strong> Got a specific question about a tax strategy? You\u2019ll have access to our team of tax experts to get the accounting and tax answers you need.<\/li>\n<li><strong>Annual 1-on-1 Live Consultation:<\/strong> Once a year you get a live meeting with a tax expert to discuss anything tax savings you would like. This is your time to get your questions answered live 1-on-1.<\/li>\n<li><strong>Annual Bookkeeping Analysis:<\/strong> Annually you will submit your financials to our team of accountants and we will put together a high level business financials overview report custom to your business.<\/li>\n<li><strong>Monthly Group Webinar and Training:<\/strong> Every month, we host a live, virtual training session on a key tax topic. Join us live and bring your questions or view the recording on your own schedule.<\/li>\n<li><strong>Partner Directory and Discounts:<\/strong> You get exclusive, members-only rates and access to our expert referral network for accounting, bookkeeping, tax preparation, payroll, financial planning, legal, retirement planning, tax resolution, and more!<\/li>\n<\/ul>\n<p>It is like having a tax\u00a0strategist walking with you along this entrepreneurial journey!<\/p>\n<\/li>\n<\/ul><\/div>\n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t<\/div><div class=\"et_d4_element et_pb_row et_pb_row_1  et_pb_css_mix_blend_mode et_block_row\">\n\t\t\t\t<div class=\"et_d4_element et_pb_column_4_4 et_pb_column et_pb_column_1  et_pb_css_mix_blend_mode et-last-child et_block_column\">\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t<div class=\"et_pb_button_module_wrapper et_pb_button_0_wrapper et_pb_button_alignment_center et_pb_module \">\n\t\t\t\t<a class=\"et_pb_button et_d4_element et_pb_button_0 et_animated et_pb_bg_layout_light et_block_module\" href=\"https:\/\/taxelm.com\/\">Join TaxElm<\/a>\n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t\n\t\t\t<\/div>","protected":false},"excerpt":{"rendered":"","protected":false},"author":2,"featured_media":6177,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"rs_blank_template":"","rs_page_bg_color":"","slide_template_v7":"","_et_pb_use_builder":"on","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[32,78,36,51,33],"tags":[42],"class_list":["post-6176","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-accounting","category-management","category-small-business","category-tax-planning-strategy","category-taxes","tag-blog"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v27.7 (Yoast SEO v27.7) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>What Is Depreciation for Small Businesses? | IncSight<\/title>\n<meta name=\"description\" content=\"Learn how depreciation affects your business finances and when a capitalization policy makes sense. Get practical guidance on IRS rules and asset management for small businesses.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.incsight.net\/blog\/2024\/07\/17\/what-is-depreciation-for-my-business-when-does-a-capitalization-policy-make-sense-3\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What Is Depreciation for Small Businesses? Capitalization Policy Explained\" \/>\n<meta property=\"og:description\" content=\"Learn how depreciation affects your business finances and when a capitalization policy makes sense. 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