Depreciation has three forms: the first and most common is time based depreciation, the second is a utilization form which is most commonly found in large engineered equipment companies, and the third is tax based depreciation.
When it comes to depreciation, no two businesses are alike. Unlike traditional straight line depreciation where the asset value is costed out to depreciation expense in equal increments over a given life expectancy, accelerated depreciation expenses the cost at higher values during the earlier accounting periods and at a lower amount towards the last half of the asset’s life expectancy.
The Internal Revenue Service defines a business expense as ‘ordinary’ and ‘necessary’. Ordinary expenses are those costs typically incurred in your industry. A restaurant would not ordinarily purchase vaccines. And a medical practice would not purchase 50 heads of lettuce.
There are various forms of depreciation used in the small business world. In general, depreciation is not required but it is advisable. A small business owner should understand depreciation and the various forms of how to calculate the deduction.
