Can You Claim Rental Inventory as an Expense?
There are rules in place to decide what can be expensed and what can't. Rental property can be expensed, but the amount depends on the intent of the business. If a business intends on selling the rental property -- such as a lease to own option -- it is considered inventory and must be expensed as it is used. If a company intends on renting the property for income, it can be expensed through depreciation, which also offers certain tax advantages.
There are two main ways to depreciate assets: straight-line and accelerated. The straight-line method writes off the same amount for each year of the assets' useful life. The amount written off is a function of the assets useful life, the salvage value and the purchase price, or cost of the asset. For example, if you purchased equipment with a useful life of 4 years for $5,000, and you can sell the equipment for scrap for $1,000 after 4 years, the calculation of depreciation is:
($5,000 - $1,000) / 4 or $1,000
Accelerated depreciation may double the amount calculated with the straight-line method to $2,000 in the first year. The method used depends on how fast the asset loses its value.
Not every asset can be depreciated. Only assets that are intended for use for more than one year can be capitalized and subsequently depreciated. For example, inventory is generally considered a current asset. That is, the intention is to sell the inventory within one year. For this reason, you can't depreciate inventory because it is meant for sale and not for use in your business.
Rental equipment is used to make a sale and is therefore eligible for depreciation, which can then be expensed. If the equipment is purchased for the purpose of selling, such as leasing with the intent to sell, it cannot be depreciated. That said, just because an asset can't be depreciated does not mean it isn't expensed against taxable income.
The advantage of depreciation is that even if you don't completely pay for the asset -- for example, if you purchase the asset on credit -- it can still be fully depreciated. If you purchase inventory on credit, it is only expensed when sold, and the amount expensed is based on certain inventory valuation methods.