This depreciation asset class typically includes assets that have a useful life of between 5 and 7 years, and are typically considered to be intermediate-term assets. They are depreciated over a period of 5 to 7 years for tax purposes.
Examples of assets that may qualify for this depreciation class include:
- Office equipment, including items such as computers, printers, and copy machines.
- Furniture and fixture items such as desks, chairs, and filing cabinets.
- Vehicles, including cars, trucks, and vans that are used for business purposes.
- Machinery and equipment, such as industrial machines, production equipment, and heavy-duty tools.
- Tools and small equipment like power tools, hand tools, and small appliances.
The specific assets that qualify for the 5 to 7 year depreciation class may vary depending on the tax laws in your jurisdiction, so it’s important to consult with us for guidance.
5 Assets with a Useful Life of Less Than 20 Years
Assets with a useful life of less than 20 years are typically considered to be short-lived assets. Those assets are often referred to as “current assets” because they are expected to be converted into cash or used up within one year.
The following are examples of short-lived assets:
- Cash and cash equivalents such as currency, checking accounts, and short-term money market funds.
- Accounts receivable refers to amounts due from customers for goods or services that have been sold on credit.
- Inventory like raw materials, work-in-progress, and finished goods that are held for sale.
- Prepaid expenses such as rent, insurance, and taxes that have been paid in advance.
- Short-term investments, including investments such as government bonds, commercial paper, and certificates of deposit with a maturity of less than one year.
Those assets are important to businesses because they are used to fund operations and are considered to be highly liquid, meaning they can be converted into cash quickly and easily. However, since they have a relatively short life, they must be continually replaced to maintain the liquidity of the business.
When does cost segregation come into play?
Cost segregation is a tax planning strategy that allows businesses to reclassify certain building components and personal property as shorter-lived assets, which can be depreciated over a shorter period of time than the building itself.
The benefits of cost segregation include:
- Accelerated Depreciation: By reclassifying certain building components and personal property as shorter-lived assets, cost segregation allows businesses to take advantage of accelerated depreciation, which means you can write off the cost of these assets over a shorter period of time, reducing your taxable income in the process means you can write off the cost of these assets over a shorter period of time, reducing your taxable income in the process.
- Increased Cash Flow: By reducing taxable income through accelerated depreciation, cost segregation can increase cash flow for businesses, allowing you to reinvest the savings into your operations or other initiatives.
- Improved Financial Performance: By reducing taxable income and increasing cash flow, cost segregation can improve a business’s financial performance and increase its overall value.
- Increased Deductions: Cost segregation can also result in increased deductions for repairs and maintenance, as well as deductions for remodeling, upgrades, and renovations, which can further reduce taxable income.
- Better Tax Planning: Cost segregation can also provide a valuable tool for tax planning, as it allows businesses to make informed decisions about investments in real estate and other assets, and to optimize tax strategies to reduce its overall tax liability.
It’s important to note that cost segregation is a complex area of tax law. The specific benefits vary depending on the individual circumstances of each business. For this reason, it’s always best to consult with us for guidance on how cost segregation can benefit your specific situation.
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