Depreciation is a complicated accounting subject that cannot be completely explained in one article. The focus of this article will be to explain what depreciation is, why it is used and to provide examples of arts / crafts assets that should be depreciated.
What is Depreciation?Depreciation is the way you expense the cost of acquiring a long-term asset over the useful life of that asset.
What is a Long-term Asset?Normally, a long-term asset is any equipment purchase you will be able to use for one year or more. Practicality also has to play a part here. For example, I have a stapler in my office for going on four years. Does that make it a long-term asset?
Of course not – there has to be a sprinkling of common sense when differentiating between supplies and assets. Many companies set a dollar limit threshold. Company policy may be that any office supply type purchase that costs under $50 is an expense rather than an asset which is depreciated.
Examples of Arts / Crafts Assets
Well, these will differ based upon the type of art or craft you make. If you're a weaver your loom is a long-term asset but your shuttle isn't. If you're a knitter your needles can be deducted as an expense but a knitting machine would be depreciated. Wood worker? I would take an expense deduction for the saw blades and treat any expensive table saw or router as a depreciable asset.
Depreciation Example
Let’s say you own a graphic design business and you have clients wanting you to design and silk screen a company logo onto a t-shirt for promotional purposes. You used to sub the silk screening job out but your volume of orders has gotten high enough that it's more cost efficient to do it in-house.Your company buys a silk screening machine that costs $5,000 and you figure you will be able to use this machine about five years. This is where depreciation comes in. As you will be able to use this machine in future years it is not appropriate to write the entire $5,000 off in the year of purchase. Taking the deduction for the machine evenly over it's useful life means you'll have an tax deduction and expense of $1,000 per year.
Depreciation and Tax Accounting
To expense depreciation on your tax return, regardless of your type of business entity, you have to use Internal Revenue Code (IRC) if you or your business is located within the USA. Most businesses use the Modified Accelerated Cost Recovery System (MACRS) for business equipment. You also have the option to take the special expensing depreciation under IRC 179.Depreciation and Financial Statement Accounting
To be able to accurately figure how much money your company made or lost during a period of time there has to be a matching of revenue to expense for that period of time. If you were to write off the entire cost of the silk screener in year one you would be understating net income in the first year and overstating it in all subsequent years that you used the machine. As a result you won't have accurate figures you can use to plan or budget for your arts / crafts business.
