Is Depreciation an Operating Expense?
An expense incurred as a part of any regular business operations is considered an operating expense. The periodic, schedule conversion of a fixed asset into expense as an asset is called depreciation and is used during normal business operations. Since the asset is part of normal business operations, depreciation is considered an operating expense.
Depreciation is one of the few expenses for which there is no outgoing cash flow. Cash is spent during the acquisition of the fixed asset, so there is no need to expend any more cash as part of the depreciation process unless the asset is being upgraded.
So, depreciation is a non-cash component of operating expenses.
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NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
Is Depreciation an Asset?
The cumulative depreciation of an asset up to a single point in its life is called accumulated depreciation.
Accumulated depreciation is an asset account with a credit balance (also known as a contra asset account). It appears on the balance sheet as a reduction from the gross amount of fixed assets reported.
Have an accumulated depreciation asset account allows a company’s balance sheet to easily report:
- The amount of an asset’s cost that has been depreciated as of the date of the balance sheet
- The asset’s cost
This happens because accumulated depreciation is credited each time the depreciation expense is debited. Accumulated depreciation will have a continually increasing credit balance, so it is referred to as a contra asset account.
Is Depreciation Tax Deductible?
The IRS states that depreciation is an income tax deduction that allows a taxpayer to recover the cost or another basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property.
A fixed asset is an asset that a business uses to earn income. With this kind of asset, the business owner does not expect to sell the asset within a year of acquiring it, but rather the asset will still be used in business and trade after that period of time and will help produce long-term income. A residential real estate can also be depreciated.
Depreciable assets include:
- Computers and software
- Other standard office equipment
A business has the choice as to how to take a depreciation deduction. They can choose to either write the cost off as an expense or they can deduct it as depreciation. If a company decided to write it off as an expense, they can deduct the entire cost in the first year.
A business can also depreciate the deduction and write the asset’s value off over its expected useful lifecycle. For example, if a business purchases a $60,000 piece of equipment, it can take the entire $60,000 in year one or deduct $10,000 a year for six years.
Is Depreciation a Cash Expense?
Depreciation is a common example of a noncash expense.
A noncash expense is an expense that is reported on the income statement of the current accounting period but there is no related cash payment during the period.