Are you a business owner wondering if computer software is a depreciable asset? The answer is yes! But, before we dive deeper, let’s define what depreciation means.
Depreciation is the reduction in value of an asset over time due to wear and tear, obsolescence, or other factors. In accounting, depreciation is used to allocate the cost of an asset over its useful life.
Now that we know what depreciation means, let’s talk about computer software.
What is Computer Software?
Computer software refers to a set of instructions that tell a computer what to do. It can be divided into two categories – system software and application software. System software includes operating systems like Windows or macOS while application software includes programs like Microsoft Office or Adobe Photoshop.
Is Computer Software a Depreciable Asset?
Yes! According to the Internal Revenue Service (IRS), computer software can be considered a depreciable asset if it meets certain criteria. To be depreciable, the computer software must:
- Be acquired as part of a business purchase
- Have a determinable useful life
- Lose value over time due to wear and tear or obsolescence
- Not be readily marketable
If these criteria are met, then computer software can be depreciated over its useful life.
How is Computer Software Depreciated?
The most common method for depreciating computer software is called the straight-line method. This method involves dividing the cost of the software by its useful life in years to determine the annual depreciation expense.
For example, if your business purchased computer software for $10,000 with a useful life of five years, then your annual depreciation expense would be $2,000 ($10,000 divided by 5 years).
In conclusion, computer software is a depreciable asset if it meets the IRS criteria for depreciable property. As a business owner, it’s important to understand the tax implications of owning and depreciating assets like computer software. By properly depreciating your assets, you can reduce your taxable income and save money on taxes.
Remember to consult with a tax professional or accountant to ensure that you are properly depreciating your assets and taking advantage of all available tax deductions.