What Qualifies For the 5 to 7 Year Depreciation Asset Class?

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:

  1. Office equipment, including items such as computers, printers, and copy machines.
  2. Furniture and fixture items such as desks, chairs, and filing cabinets.
  3. Vehicles, including cars, trucks, and vans that are used for business purposes. 
  4. Machinery and equipment, such as industrial machines, production equipment, and heavy-duty tools.
  5. 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:

  1. Cash and cash equivalents such as currency, checking accounts, and short-term money market funds.
  2. Accounts receivable refers to amounts due from customers for goods or services that have been sold on credit.
  3. Inventory like raw materials, work-in-progress, and finished goods that are held for sale.
  4. Prepaid expenses such as rent, insurance, and taxes that have been paid in advance.
  5. 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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.

You Might Also Like

Did you like this article?

Get notified when I publish new articles. Just enter your email address below.

About the Author

Eric Sheldon

Eric Sheldon

Eric Sheldon is a certified public accountant with more than 25 years of experience in a wide variety of industries. He's the owner/operator of Eric Sheldon CPA, PC, an accounting firm that specializes in providing tax strategy and preparation, accounting, and bookkeeping services to individuals and small business owners.

More information:

Understanding Tax Underpayment Penalties: A Simplified Guide

Navigating through the complex world of taxes can be a daunting task, particularly when it comes to understanding potential penalties associated with underpayment of taxes. In essence, an underpayment penalty is a fine imposed by the Internal Revenue Service (IRS) on individuals who do not pay enough of their total tax liability throughout the year.

Read More »

The Top 10 Key Factors Every Pass-Through Entity Needs to Know

In the dynamic world of business, it’s vital to comprehend the tax implications associated with your chosen business structure. This is especially true for pass-through entities, where the tax landscape is complex yet ripe with opportunities for strategic planning. If you’re a proprietor, partner, or shareholder in a pass-through entity, such as an S Corporation,

Read More »

The SALT Cap Workaround for Pass-Through Entities

In response to complaints about the Tax Cuts and Jobs Act of 2017 SALT cap, many states have authorized workarounds that allow a pass-through entity to pay state income taxes at the entity level. The entity deducts the payments and passes them to the individual owner as deductions or credits, bypassing the SALT cap at

Read More »

Understanding Tax Underpayment Penalties: A Simplified Guide

Navigating through the complex world of taxes can be a daunting task, particularly when it comes to understanding potential penalties associated with underpayment of taxes. In essence, an underpayment penalty is a fine imposed by the Internal Revenue Service (IRS) on individuals who do not pay enough of their total tax liability throughout the year.

Read More »

The Top 10 Key Factors Every Pass-Through Entity Needs to Know

In the dynamic world of business, it’s vital to comprehend the tax implications associated with your chosen business structure. This is especially true for pass-through entities, where the tax landscape is complex yet ripe with opportunities for strategic planning. If you’re a proprietor, partner, or shareholder in a pass-through entity, such as an S Corporation,

Read More »

The SALT Cap Workaround for Pass-Through Entities

In response to complaints about the Tax Cuts and Jobs Act of 2017 SALT cap, many states have authorized workarounds that allow a pass-through entity to pay state income taxes at the entity level. The entity deducts the payments and passes them to the individual owner as deductions or credits, bypassing the SALT cap at

Read More »