Understanding Tax Depreciation
Learn how to calculate tax depreciation for different assets and understand the importance of matching expenses with revenue. Ideal for tax preparers and individuals preparing their own tax returns.
What you’ll learn
- Students will better understand tax depreciation and how to calculate it for various types of assets.
Depreciation is one of the most confusing elements of tax preparation. In my experience it is the reason most taxpayers go to paid tax preparers.
In this course you will learn what constitutes a depreciable asset and why assets are depreciated instead of being expensed when purchased.
Your goals for this course are to:
1. Learn how to classify fixed assets.
2. Learn about deprecation methods, depreciation conventions, and useful lives.
3. Learn about depreciation recapture and how gains and losses work when assets are sold.
The Internal Revenue Service does not permit expenditures for items benefiting a company’s revenue stream for more than a year to be expensed in the year of purchase. The accounting profession follows the matching principle which states that revenue for a period needs to be matched with expenses for the same period. Since assets often support a company’s revenue stream over their useful life, the cost of an asset must be spread over the estimated useful life to more properly match its cost against the revenue it helps produce.
If your company buys a saw to help produce finished lumber from raw timber for $7,000, and it is expected to last for 7 years, it must be depreciated for 7 years. The rational is that the saw will help produce income from the sale of finished lumber over its useful life. The saw is therefore written off at $1,000 per year for 7 years to match the revenue produced with the expense incurred.
The IRS allows departures from the matching principle at times to encourage U.S. production, but in general that is the theory behind depreciation.
Who this course is for:
- Tax Preparers, those wanting to become tax preparers, or individuals wanting to prepare their own tax returns.
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