Tax Tip Tuesday E.7 – Depreciation

Hey, here we are 7 weeks into our Tax Tip Tuesday series, have they been informative?

Let me know.

While all this info is super important for wealth creation, I can’t wait to get back into the strategy posts.

I have been traveling, speaking, and helping breweries push through the plateau. Yes, I said plateau; not shakeout, or bubble. Every industry goes through a plateau after rapid growth.

I promise to help you push through it!

This week I am talking about depreciation.

Let’s start with a simple definition.

Depreciation is the benefit you receive over a given time period from the capital assets or improvement you purchase or make. (BH, fermenter, canning line, HVAC, etc) Capital assets are depreciated when they are placed in service and depending on their use, depreciated over 3, 5, 7, 15, or 40 years. Capital assets are important to monitor in a manufacturing setting given the size and price tag of the equipment.

Three important reasons to track fixed assets:

  1. The IRS requires it
  2. It makes it easier to track the movement of these assets. Examples: If you need to replace an asset, something gets damaged, you buy more equipment. All these scenarios require semi-complex calculations that would be a nightmare if the assets were not on the balance sheet.
  3. Capital assets help your balance sheet. Banks, rich uncles, and investors love a healthy balance sheets.

More times than not when we have taken over tax work for a brewery, we inherit a depreciation schedule that looks like this:

While this is a nice attempt to build a fixed asset listing, it is not helpful. It does not tell us much about what the asset is.

We prefer to list our assets out like this:

We take great detail in our fixed asset listing for a couple of reasons. First, you are continuously swapping out equipment. When you do this we must take the right steps to dispose of the asset to report a gain or loss. Another reason we do this is for asset tracking. We provide our customers with a detail listing each year so they can track the life of the asset. Last, you are in a capital intensive industry. Your metal is your money maker, it needs to be tracked with this level of detail.

I suggest you take a look at how your assets are being tracked and depreciated. It’s never too late to dive into more detail.

-cf

Got a tax question, don’t be skeer’d, ask here.

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