Some Facts About Straight Line Depreciation and Commercial Property
There is aÂ very good reason we pay accountants to take care of our business income, expenditures, tax liabilities and so forth.Â That is to prevent ourÂ brains from getting twisted up in total confusion.Â Just saying the phrase straight-line depreciation can cause the basic " fright, fight, flight" instinctsÂ to kick in with sweaty palms, eyes falling back into the head as the fright element. Then if they start to talk about alternative depreciation methods and you might want to fall into fight mode and punch them, or justÂ turn to the flight mode, and distance yourself from the whole thingÂ and trust they know what they are talking about.
In these economic times, or any times really, this is not a good plan. The business owner needs to have some idea of what it going on around him. Of course many small business owners do the day to day accounting themselves and so are more involved in the whole financial end of things. No matter which way you do things, it is helpful to know something about depreciation.
The simple way to look at the term straight-line depreciation is like this. You own a business and buy a computer. You want to subtract or deduct the cost of the computer from your income or profit line, which is fine,Â Because the computer is expected to last you five years,Â before it is outdated, you cannot deduct the full cost of the computer from your profit/loss calculations the year you bought it. You simply split the cost over five years, and take some off for each year. By taking the original cost and subtracting the depreciation you have claimed, and then you get what cold be called the current market value.
Taking this to a larger scale, a commercial property like an office building orÂ shopping center, will typically use straight-line depreciation for the building over a 39 year period. What is important for the business owner to know,Â is that there are ways to legally separate out pieces of the property that typically have a shelf life much less than 39 years, like 7 or 15 years and put them on a separate depreciation schedule. It still might be straight-line depreciation, but just nor for 39 years. The end result is more money can be deducted from the front end of the loan, lowering your monthly obligations. This is when it becomes important to seek out a financial specialist who specializes in this sort of depreciation, called cost segregation analysis.