Please Help! Depreciation Question!!!

Discussion in 'Growing and Managing a Business' started by KKAPADIA, Oct 7, 2014.

  1. KKAPADIA

    KKAPADIA
    uix_expand uix_collapse
    New Member

    Joined:
    Sep 7, 2014
    Messages:
    4
    Likes Received:
    0
    I never understood how depreciation works and why would anyone want to list it. I understand that you get to claim depreciated value as an expense, and I understand why...but why would anyone want to do it? I'm thinking in lines of more expenses equals less profit...thus less money you take home as an owner. The only reason I can think of is to drop your gross income to a low number and thus pay less money to taxes. I'm sure this depends on several factors such as, how big the business is, kind of business, company structure, etc....but am I correct in assuming that listing depreciation isn't always a good idea?

    i.e. you buy a tractor for $1,000.00 in 2000 and list it as an expense on your P&L. You know it depreciates $100.00 each year and you plan to sell it in 2007 for $300.00. Following that logic why would you want to add an extra $100.00 each year as an expense on your P&L that will eat away at your net income? That's a $700.00 loss versus a $300.00 gain on top of a $1000.00 original "loss".

    I know I'm missing something crucial here. I'm confused??? Please help?
     
  2. nidhish

    nidhish
    uix_expand uix_collapse
    Member

    Joined:
    Sep 26, 2014
    Messages:
    34
    Likes Received:
    3
    The reason why you require depreciation is because in business, especially in small scale business, when a machine is bought it is also assumed that each year it will lose its value due to excess usage. So, when the time comes when the machine is nothing but scrap the owner has to buy a new one. Iif he has maintained the depreciation account he will not have any problem buying a new one, as he has saved the funds[depreciation exp] for buying a new one. But, if he has not considered depreciation, the load of buying a new machine will hit his business big time, and his profit will be be badly influenced by it.
     
    #2 nidhish, Oct 7, 2014
    Last edited by a moderator: Oct 7, 2014
  3. MikePeterson

    MikePeterson
    uix_expand uix_collapse
    Member

    Joined:
    May 14, 2014
    Messages:
    41
    Likes Received:
    1
    Well, depreciation is one of the best and powerful business accounting and tax saving tools. Some points of depreciation are as follows:
    Depreciation is a non cash charge, it affects your company's profit and loss statement as well as your balance sheet.
     
  4. Shield Funding

    Shield Funding
    uix_expand uix_collapse
    New Member

    Joined:
    Oct 22, 2014
    Messages:
    3
    Likes Received:
    0
    It comes in handy later also if you want to sell used equipment. If the equipment is much more valuable, perhaps worth $100,000 or more, then listing the value of that item at its original price would avoid in theory some capital gains taxes. If you sold it at half its value, but depreciated it to something much lower, the difference is taxable. The advantage though is that the depreciation difference is generally tax deductible. This post from TurboTax goes into it in much, much more detail than I could here: https://ttlc.intuit.com/questions/1...epreciation-section-179-deduction-help-center
     
  5. thanhlam

    thanhlam
    uix_expand uix_collapse
    New Member

    Joined:
    Oct 22, 2014
    Messages:
    7
    Likes Received:
    0
    Excellent info here, I am currently doing some research and found exactly what I was looing for. I have some ideas, if you are interested please contact me
     

Share This Page