UNDERSTANDING DEPRECIATION: A SMALL BUSINESS OWNER’S GUIDE

Imagine buying yourself a brand-new truck for your business. The moment you drive it off the lot, it starts losing value. A few years down the road, it’s worth significantly less than what you originally paid for it. That gradual loss in value is called depreciation. While it might sound like a bad thing, it can work in your favor especially when it comes to your taxes. Many small business owners overlook depreciation or don’t fully understand how it impacts their business, but knowing how it works can help you lower your taxable income and make smarter investment decisions for your business.

Depreciation applies to high-cost assets your business buys that lose value over time such as equipment, vehicles, furniture, and even buildings. Instead of deducting the full cost of these assets in the year you buy them, the IRS allows you to spread the deduction out over several years. This makes sense because these assets help your business generate income over time and not just in the year you purchase them. 

So why does depreciation matter? First, it reduces your taxable income which means lower taxes. Second, it gives you a more accurate picture of your business’s financial health by accounting for the wear and tear on these assets. If you ignore depreciation, you might think you’re making more money than you are, which subsequently leads to poor financial decisions along the road. Keeping track of depreciation also helps you plan when it’s time to replace aging equipment or invest in new assets for your business.

Understanding depreciation doesn’t have to be complicated and you don’t need to be a tax expert to take advantage of it. The key is to keep good records of your business purchases and work with an accountant who can ensure you are maximizing your deductions. By making depreciation work for you, you’ll not only lower your tax liability but also set your business up for long-term financial stability.