Depreciable life is the number of years an asset is likely to be used, with a percentage of the asset’s initial value treated as a tax accounting expense each year. Tax agencies publish tables of allowable depreciation life for common assets, but some accountants deduct the value of an asset most in the early years of its depreciable life. Depreciation frees up cash flow for a company by reducing its overall tax liability, allowing it to use those funds for further improvements or expansions. Assets may be used beyond the point of depreciation if they are still useful to the business, and some assets may need to be replaced before the end of their presumed useful life.
The depreciable life is a reflection of the number of years an asset is likely to be used. For each year of depreciable life, a percentage of the asset’s initial value can be treated as a tax accounting expense. Accounting expenses reduce your total income for tax purposes, reducing your tax liability. Calculating depreciable life allows people to spread the cost of an asset over several years instead of claiming all the tax benefits in just one year.
Tax agencies usually publish tables of the allowable depreciation life for common assets. For example, household appliances usually have a depreciable life of five years. A building could have a depreciable life of 25 years. Specific capital improvements that make a building more functional for a business can have depreciable lives of varying lengths, depending on the nature of the improvements.
In a simple example of how the regrettable life works, a business might buy a delivery van, expecting to use it for five years. In linear depreciation, the business would divide the van’s value by five. Each year, one-fifth of the price of the truck could be recorded as an accounting expense for taxes. Spreading the value of the truck over five tax years allows the business to reduce its taxable income to receive tax benefits each year.
There are other approaches to depreciation. Some accountants deduct the value of an asset most in the early years of its depreciable life. This initially allows for greater tax advantages. When a business is particularly expensive, this can be beneficial because it allows the business to recoup more of the business’ costs immediately. Depreciation frees up cash flow for a company by reducing its overall tax liability, allowing it to use those funds for further improvements or expansions. It is important to note that when assets are used for both personal and business use, only business use is counted for depreciation.
The depreciable life of assets reflects the time those assets are likely to be used, but the assets may be used beyond the point of depreciation if they are still useful to the business. Similarly, some assets may need to be replaced before the end of their presumed useful life. Computer equipment is a prime example. Tax authorities might declare electronics to have a depreciable life of five years, but a business might need to replace computers on a more regular basis, such as every two years.
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