Depreciation spreads the cost of a major purchase over its useful life instead of deducting the full amount when you buy it. A $50,000 vehicle or a $15,000 piece of equipment gets written off gradually, matching the expense to the years you actually use the asset.

The first decision is whether to capitalize or expense. Most businesses set a capitalization threshold, often $2,500 or $5,000. Purchases below that amount get expensed immediately. Above that threshold, you add the item to your fixed asset schedule and depreciate it over time. The IRS allows a de minimis safe harbor of $2,500 per item for businesses without audited financial statements, which simplifies things for smaller purchases.

Section 179 lets you deduct the full cost of qualifying assets in the year you buy them, up to annual limits. For 2024, the limit is $1,220,000. This is useful when you want to reduce taxable income in a high-revenue year. Bonus depreciation offers another way to accelerate deductions, though the percentage has been phasing down. Your tax situation determines which approach saves the most money.

If you depreciate over time, you’ll use either straight-line or MACRS. Straight-line divides the cost evenly across the asset’s useful life. MACRS, which stands for Modified Accelerated Cost Recovery System, front-loads the deductions so you write off more in the early years. Most businesses use MACRS for tax purposes because it reduces taxable income faster.

Every depreciable asset needs to be tracked in a fixed asset schedule or register. This document records the asset description, purchase date, original cost, depreciation method, useful life, and accumulated depreciation. Without this schedule, you lose track of basis and end up with inaccurate financial statements.

Book your depreciation entries consistently. Some businesses record depreciation monthly as part of their controller-level close process. Others book it quarterly or annually. Monthly entries give you more accurate interim financial statements, which matters if you’re reviewing performance throughout the year or sharing financials with lenders.

When you sell or dispose of an asset, you need to remove it from your books correctly. Calculate the gain or loss by comparing the sale price to the asset’s book value, which is the original cost minus accumulated depreciation. Forgetting to record disposals leaves ghost assets on your balance sheet and creates problems during audits or due diligence.

Land is never depreciated. Buildings are, but over 39 years for commercial property. Vehicles typically depreciate over 5 years, office furniture over 7 years, and computers over 5 years. These recovery periods come from IRS guidelines, though the actual useful life of your specific asset might differ.

The complexity comes from having multiple assets with different methods, lives, and start dates, plus the interaction between book depreciation and tax depreciation. Many businesses use different depreciation for financial statements than they do for tax returns, creating timing differences that need to be tracked.

If you’re running a business with significant fixed assets, depreciation decisions directly affect both your financial statements and your tax liability. Premium business accounting in Boca Raton that includes proper fixed asset tracking ensures you’re maximizing deductions while keeping your books accurate. Getting this wrong means either overpaying taxes or creating audit exposure down the road.