Depreciation...

["Reeve Fritchman" <reeve@xxxxxxxxxx>]

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…is basically a tax gimmick.

With your $25,000 business exemption, you can reduce your taxable revenue by
“expensing” (deducting) item(s) that have a useful life of > 1 year.  Stuff
with a useful life of less than one year (toner cartridges, etc.) is always
expensed.

When you depreciate something over 10 years using the straight-line method,
you can “expense” (reduce/offset taxable income) 10% of the asset’s price
each year; it’s all about the IRS getting money sooner than later.  The IRS
offers some flexibility with computers, but I think you can go as short as
three years; the depreciation basis decision is made by the IRS based on the
expected economic life of the asset.  Since land “never” wears out, it
depreciates slowly.  If depreciation went away suddenly and everything was
expensed, the Feds would have a catastrophic reduction in tax collections
that first year, then everything would be back to “normal” with one
exception: depreciation is a way to smooth the tax stream to the Feds.
Without depreciation, business tax revenues would vary wildly.

I’d suspect hardware and software on the iSeries should be grouped into one
depreciation category, since one doesn’t work without the other; I don’t
know what the IRS rules are regarding software vs. hardware depreciation.
But most other software and hardware could be depreciated differently on a
practical basis, since an Office 97 installation is independent of the
hardware platform.  You could keep O97 running on at least two
price-performance generations of hardware, but I don’t know if the IRS
allows (or requires) this.  And then you have application software
(ERP-size) vs. database managers (on PC’s) vs. OS software.

Usually, the goal is to depreciate an asset as quickly as possible so you
get a bigger tax deduction each year.  But if you’re not making money,
depreciation doesn’t help.  That’s why accountants play games: they’re
juggling profits vs. depreciation vs. time, and that’s why there are lots of
complicated rules about switching depreciation methods.  Even intangible
assets (goodwill) and depleting assets (oil reserves) can be depreciated,
except it’s called “amortization”.

This stuff is almost as boring as programming!
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