Can You Take Depreciation in a Cash-Basis Business?
A cash-basis business is not one that will not take checks or credit cards, it is a business that uses the cash basis of accounting for ledgers and Internal Revenue Service filings. Cash basis accounting counts income only when payment is actually received. Expenses count only when they are actually paid. This does not mean you can deduct the entire amount for large assets when you purchase them, even though you actually paid the full expense.
Your cash-basis accounting will have to show large assets as ongoing expenses for a period of years, even if you already paid for them. This means you will take off a portion of the expense of the asset over several years. The Internal Revenue Service requires this because large assets are purchased to provide income for years, and so the expense of those assets must be taken off during the years the assets produce income.
You can determine the life of your asset by contacting the manufacturer. You can also depreciate according to these IRS guidelines: Three-year depreciation includes cars and light-duty trucks; five-year property covers computers, printers, scanners, monitors, typewriters, copy machines, calculators and business cars, trucks and vans; seven-year property is office furniture, carpet, appliances and telephones; 10-year depreciation applies to tug boats, water vessels and barges; 15-year property is property improvements such as sidewalks, fences and shrubbery; 20-year property includes farm buildings and sewer systems; 27.5-year depreciation applies to residential rental property as well as office buildings, stores and warehouses and 39 years of depreciation can be taken for nonresidential real property.
List your depreciated property on IRS form 4562. This form has sections for each type of property (categorized by the number of years allowed for depreciation). Always keep a copy of this form when you file your taxes so that you will have reference for the following year.
Read More: Depreciation of Land and Buildings
Because you run a cash-basis business, you will deduct daily expenses and small purchases fully in the year you buy them. Your cash basis requires you to record these transactions only when the payment actually occurs, not when you receive the invoice. It is to your advantage to deduct as many expenses as you can instead of using depreciation, because when you deduct you get the full value of the purchase as a subtraction from your income during the year the purchase was made.