Know the difference: Depreciated vs. non-depreciated assets

When you hear "depreciation," you probably think of something losing value. In the business world, depreciation is how business owners spread out the value of an asset over time.

You might have assets like computers, home office equipment, and premium software as a freelancer. You can depreciate these assets over time for tax purposes. But not all assets are created equal—some can't be depreciated, and others limit how much you can depreciate them.

In this blog, we're clearing the air about what depreciation is, what assets cannot be depreciated, and which can.

What are depreciable assets?

A depreciable asset is one that a person or business acquires to use in their trade or business and loses value over time due to wear and tear, obsolescence, or other factors. Depreciable assets include tangible, physical items like machinery, cars, buildings, furniture, and office supplies, and intangible assets, like patents, copyrights, trademarks, and software. In the latter case, "amortization" is often used instead.

The accounting technique that spreads out the cost of an asset over its expected useful life is called depreciation. For example, if you buy a car for your business, you can depreciate its cost over five years, deducting a portion from your yearly taxes. This makes it easier to see how much money the asset is making compared to how much it costs, which gives you a better idea of how much the asset is helping the business. It can also save you money on taxes, especially if it's an expensive asset.

Here are some key things to note about depreciable assets:

• You can depreciate any asset with a useful life of more than one year.

• The amount of depreciation you can claim each year is based on the asset's cost, useful life, and salvage value.

• The useful life of a depreciable asset is how long it's expected to be useful to a business before it's no longer usable. This can vary depending on the type of asset and industry standards.

• Different ways to calculate depreciation include straight-line, declining balance, and units-of-production. These are all different methods for spreading out the cost of an asset.

• The book value of an asset is what's left of its original cost after subtracting how much it's depreciated. The amount shown on the balance sheet is the asset's value.

How to calculate depreciation

There are a few different ways to depreciate assets for tax purposes. The straight-line method is the most common. This means dividing the asset's cost by its useful life and deducting that amount each year. For example, if you buy a piece of equipment for $10,000 that has a useful life of 10 years, you would depreciate it at $1,000 per year.

You can also depreciate assets using the accelerated depreciation method. This method lets you deduct more of the asset's cost in the early years. This is a better option if your business is growing quickly.

Here are some other methods of depreciation:

• Sum-of-the-years'-digits method

• Modified accelerated cost recovery system (MACRS)

• Double declining balance method

• Group depreciation.

If you are unsure which method to choose, talk to your accountant to help you figure out the best one for your business.

What are non-depreciable assets?

A non-depreciable asset is an asset that doesn't lose value over time, so you don't have to pay repeated taxes on it. They are sometimes called fixed assets. These assets usually last forever, so they are not depreciated like other assets. 

If you are wondering, "What are good assets to buy to make money?" here are some non-depreciable assets to consider:

• Land: Land is a prime example of a non-depreciable asset. Landowners don't have to spread the cost of land on their financial statements over time because land generally has an indefinite useful life. In other words, it doesn't wear out or become outdated like other assets, like machinery or equipment. But furnishings on land are depreciable, like buildings and structures.

• Artwork and Collectibles: Art, souvenirs, and antiques are non-depreciating assets because they usually increase in value over time rather than lose value. This is due to their uniqueness and high demand, making them a good investment.

• Investment and Securities: Stocks, bonds, and other financial investments are typically non-depreciable assets. They fluctuate in value according to market conditions but do not depreciate over time as physical objects do.

• Goodwill: Goodwill is the extra money a business spends to purchase another because of the value of the business name, strong customer base, positive customer and employee relations, and any patents or intellectual property the company may have. It is an intangible asset that cannot be depreciated, but it may become impaired if the value of the acquired company drops.

• Inventory: This is a frequently asked question: Is inventory depreciable? The quick answer is no. However, the cost of goods sold (COGS) is calculated for tax purposes when the inventory is sold. Inventory and account receivables make up a category of assets called current assets.

• Copyrights and Trademarks: Copyrights and trademarks are intellectual property assets that don't depreciate like other assets. Instead, they're amortized over their legal or contractual life. In other words, you can write off a certain amount of their value each year, depending on how long they're expected to last.

Non-depreciable assets are wise investments because they have enduring value and can benefit your business for as long as it runs. 

Accounting for your non-depreciable assets

Just because non-depreciable assets don't depreciate doesn't mean they don't need to be accounted for. Some non-depreciable assets may be eligible for tax deductions or credits in certain situations, and intangible assets like goodwill may need to undergo impairment testing. For example, if your business sells a non-depreciable asset, you should pay capital gains tax on the profit. Also, if you use a non-depreciable asset for personal purposes, you might have to pay income tax on the asset's fair market value. So, how do you make sure your accounts are done right?

First, you must keep track of all your money—income and expenses. You can do this using a spreadsheet, budgeting app, or even a notebook. It's important to be as detailed as possible so you can see where your money is at every moment.

Also, because tax laws can vary and change over time, it is important to always consult with a tax professional or accountant familiar with the laws for depreciation in your jurisdiction. This way, you constantly ensure that you're treating your assets correctly on your tax returns and taking advantage of all the deductions and depreciation allowances available.

Workee makes it easier. 

Workee helps you regulate and record both incoming and outgoing payments, making tracking your money much easier. 

But that's not all. As a freelancer or independent professional, you can transform your business with Workee's powerful business management tool. This comprehensive solution offers everything you need to manage your clients, schedule meetings, and get paid seamlessly. 

Workee is the perfect tool to help you get organized and save time. With its easy-to-use website builder, you can create a custom site that reflects your brand perfectly. And the built-in booking and billing features make it easy to manage your business on the go. Workee takes care of all the nitty-gritty stuff like taxes and integrations so you can focus on your business: doing great work for your clients.

So what are you waiting for? Sign up for Workee today and start streamlining your workflow! 

Summary

Non-depreciable assets don't lose value over time or do so very slowly. Examples include real property and goodwill. However, just because an asset is non-depreciable doesn't mean you don't have to pay taxes. So, it's important to keep detailed records of depreciated and non-depreciated assets to stay on the right side of the tax law.

If you're considering buying a non-depreciable asset for your freelance business, speak with your accountant or a tax consultant to determine the tax implications.

Use Workee to keep your business transactions together and safe, and enjoy all the perks of our fantastic freelancing software platform. Get started on Workee here.