By Rob Poterucha, CPA
FixedAssets and how to depreciate them on tax returns comes with a variety of options. Today, Rob Poterucha breaks it down for us.
Rob Poterucha, CPA | Supervisor
see vlog transcription below:
My name is Rob Poterucha, and I am a Tax Supervisor at MHCS, a full-service CPA firm with offices in West Des Moines and Winterset, Iowa.Today’s topic of discussion is Fixed Assets and the changes resulting from tax reform.
First, let’s define what “fixed assets” are. Fixed assets, generally, are tangible assets that are used in a business. Types of fixed assets include buildings, machinery, furniture, equipment, and vehicles. There are also some intangible assets that would be classified as fixed assets, one of which is computer software.
Now that we’ve defined what fixed assets are, the next question is how the cost of these assets are recovered on a tax return. It’s done through what’s called depreciation. In a normal context, we think of depreciation as a reduction in value of something. For example, when you purchase a new car, the minute you drive off the lot, the car has depreciated in value. However, for tax purposes, it has a different meaning. Depreciation is a tax deduction that allows a taxpayer to recover the cost of fixed assets over a certain period of time. The amount of time an asset is depreciated depends on the asset. Common lengths of time include 5 and 7 years for equipment, and 27.5 and 39 years for buildings.
Since we are dealing with the tax code, there are bound to be some different ways to calculate depreciation. First, you can depreciate an asset over its useful life like I just mentioned. Second, you can elect to depreciate the entire cost of something in the year of purchase through Section 179 expensing or bonus depreciation. There are various rules to these two methodologies, but generally, they allow you to deduct the entire cost of an asset in the year an asset is purchased. One example of this is a farmer who buys a new tractor towards the end of the year because they want to reduce their tax liability. Section 179 or bonus depreciation is how they achieve that result.
Please reach out to your tax professional at McGowen Hurst Clark Smith to learn more about Fixed Assets and what your business can do to maximize your tax savings.