Redpill me on Depreciation, /biz/. Is it just an accountants'

You have it backwards.

You have 100 bucks in the bank.
You pay 100 bucks to buy an asset.
Now you have 0 bucks and an asset.

But even though you just spent your 100 bucks, the IRS doesn't accept it as a business expense. Instead they force you to write off 20 bucks for the next 5 years.

So even though in the first year they pay 100 bucks, they can only avoid tax on 20. And money in the past is always more valuable than money in the present. So depreciation is a really bad deal for businesses compared to having the full price count as a business expense immediately. It's something tax laws force businesses to do, because it benefits the state.
In the first year your profit on paper is way higher than it actually is, and yes, in later years your profit on paper is lower than it actually is. This is not a good thing for the business though. You want to write off shit as soon as possible.

w-w-whaat?
Well I am gonna take bait, there's more to assets than cash.

You know how your computer doesn't work as well as when you bought it? That's depreciation.
Real estate, cars, machinery, etc. gets old and becomes less useful for its intended purpose.
It would make no sense declaring that you have a 80k car in your estate when you and everyone else knows that it's a 20 year old piece of shit that you couldn't sell anywhere near that price.
Deducting asset depreciation is no trick, it's something tax law allows to show the real cost of producing goods and services across time.

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>>1760349
This.

Bonus of you can make your rental carpets and ceiling fans last 10 years instead of 5. Etc...

Just one of the manu aspects of the tax code.

Also, dont say "avoid taxes" its felony tax evasion. Say something like "fits my tax plan."

Yes i am serious.

No i didnt write the law.

No, nobody asked my opinion or i would have punched them in the dick for being retarded.


Source:

Student of personal finance for over a decade...

>>1760323
>Is it just an accountants' trick to avoid tax?

No, it's a government's trick to bar you from immediately deducting equipment/buildings from your profits.

>>1760344
fpbp

A fundamental rule of accounting is to match expenses to the period in which they generate revenue. By depreciating an asset the expenses are spread out over the useful life of that asset so the expense doesn't only affect profits in the first period which the asset is bought. There's no tricks.


That said, tax depreciation and financial statement depreciation can be different, although they end up the same once everything has been depreciated. The Reagan administration set up some simple tables with which to depreciated assets by category (straight line 27.5 years for residential real estate, 39 for non residential, etc.), But on the financial systems a company can use whatever depreciation method they want so long as they end up at the same amount.

Source: In accounting

>>1760323
If a firm's B/S has a relatively larger amount of depreciation than other firms within the same market sector then they will have a lower amount of gross profit and therefore will pay less taxes. So yeah their bottom line will increase but not unjustly. Look into accounting theory if you're struggling with the "why" and not the "how" of accounting?

Interesting. Is this why big corporations refuse to own real estate anymore and almost always rent office space?. It has always baffled me that they always always lease instead of own when possible. Is rent deductible forever and depreciation only for X years?

>>1761760
>Is rent deductible forever and depreciation only for X years?

Naturally yes. But this alone would be a terrible reason to prefer renting. If you buy for 100k and write off 4k for 20 years you won't get any effect on your profit after 20 years. But you've also never had to spend a dime since the very first year. If instead you rent for 4k a year, it's profit-equivalent for 20 years, but after that you start putting in more money than you would have otherwise. Let's assume 25% tax. Spending 4k and deducting it as a business expense only nets you 1k in saved tax. You're still spending 3k more than in the alternative scenario.

There are several real advantages though: It's much better on your cashflow. Coming up with 100k at the very start is obviously much harder than coming up with 4k each year. Let's not forget that inflation makes the large initial sum even more valuable than any money spent years later. And if you think you can spend the 100k of your capital more profitable than what you'd save on rent (opportunity cost), it's a sound decision to put the money into what nets you the most profit, ie your core business. Leasing is also usually more convenient, since you don't carry any risk when it comes to your building. If something goes wrong, you phone your rental company and have them deal with it. There is also an aspect in balance fu. Owning an asset means it extends your balance. If you buy/build a building you have a huge chunck on the asset side, but by definition of double accounting also an equally large chuck on the liability side. So if you buy on credit, your equity ratio tanks and your company looks bad to outsiders (even when owning is actually preferable to renting in your situation).

There's obviously draw-backs - it's harder to get custom buildings (although for large clients rental providers will literally build you whatever you want) and you usually have to pay extra for the convencience. But it's not a clear cut decision.

>>1760323

>the money is still in the bank

No, the money, all of it, left the bank the moment you bought the asset.

>>1761760

Expenses aren't really deductibles, they're things that lower your profit. It's fucking stupid to incur an expense of, say, 1000$ just so you can pay 250$ less to the tax-man. You only do that if that expense has other benefits worth the remaining 750$.

The reason people rent, and the only reason anyone should ever rent, is liquidity and oppertunity cost reasons. If you have more cash than you know what to do with, move away from rented stuff to owned stuff, or pay dividends.

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>>1760456
>>1760349
this and this
>tfw /biz/ actually knows stuff on the weekends

What is cash basis accounting?