Ask the Expert: What is the difference between Depreciation & Expensing?
The simple answer to the previous question is that short-term business purchases are expensed, while long-term assets are depreciated. If you read below, we define the two terms in order to illustrate their differences.
Operating Expenses
Operating expenses are expenses most businesses have, like: rent, equipment rental, utilities, supplies, postage, dues and subscriptions. Operating expenses are important because they reduce the taxable income of the business; they are “deductible.” In order to be deductible, expenses must be:
- Ordinary and necessary to the operation of the business
- Spent during the current year
- Reasonable in amount (which is why meals and entertainment expenses are limited)
- Directly related to the business.
Depreciation of Assets
Long-term assets that are used in a business can be deductible through the process of depreciation. In simplest terms, the cost of the asset is spread over a period of time, as determined by the useful life of that asset. For tax purposes, these assets are called “capital expenses.”
GFTC offers a Federal Depreciation Look-Back Analysis service that has the potential of improving cash flow by reducing our clients’ current federal and state income tax. Our process enables a company to accelerate federal tax depreciation into the current year from investments made in buildings and other fixed assets in the past. The cash savings realized from our analysis can be used in your business today.
For more information about our services and experienced professionals, please visit our website at www.genfitax.com or contact your local business development executive at 1-800-733-5252 ext. 7022.
