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Letice Morgan
ID: L30125696
Discussion Thread: Introduction to Taxation
Sept 21, 2023
K-O -Question 3: Taxpayers typically attempt to get the most depreciation as possible.
Describe the importance of properly classifying assets.
For tax purposes, property is classified by both use and its type. The use and type of
property are classified as personal and business. Taxpayers usually attempt to get the most
depreciation as possible because they have the benefit of taking a deduction. “Depreciation is
the method of deducting the cost of tangible property and real property (other than land) over
a specific time period” (Spilker, et.al, 2024). If a taxpayer classifies an asset wrong, it could
greatly throw off the tax return and have them with a false profit or balance due. To guarantee
the proper assessment on the assets are done, the tax preparer has to ensure the assets are
classified correctly. Classifying assets are extremely important because it allows the taxpayer to
deduct allowable depreciation for the current year and carryovers. A taxpayer is legally able to
defer income tax, increase cash flow, and create additional tax deductions.
Depreciation is a method used to allocate the cost of tangible assets or fixed assets over
an asset's useful life. In other words, it allocates a portion of that cost to periods in which the
tangible assets helped generate revenues or sales. By charting the decrease in the value of an
asset or assets, depreciation reduces the amount of taxes a company or business pays via tax
deductions. A company's depreciation expense reduces the amount of earnings on which taxes
are based, thus reducing the amount of taxes owed. The larger the depreciation expense, the
lower the taxable income, and the lower a company's tax bill. The smaller the depreciation
expense, the higher the taxable income and the higher the tax payments owed. (Tarver, Evan.
What Is the Tax Impact of Calculating Depreciation?2021)
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When it comes to the use of property when classifying assets, the use of property
determines if the taxpayers’ deductions are allowed for current that year expenditures;
concerning the property, the capital and any additional deductions for depreciation that are
outlined in the IRS tax codes. To take any type of deductions pertaining to the property, the
property must have served a business purpose. It must be used in trade or business for the
production of income. The term trade or business generally includes any activity carried on for
the production of income from selling goods or performing services. This is basic requirement
for deduction for deduction of expenses. Deduction for expenditure on property that is held for
personal use are not allowed for deduction. Even though specific expenditures are allowed on
the use of personal property, such as property taxes and mortgage home interest, we still have
to properly classify the use of the asset when determining the property’s taxable income.
(Trade or Business Defined, 2023 (IRS.GOV).
Lastly, we will discuss the types of property and how it affects the deductions allowed
during the period the property is used. All property can be classified as tangible or intangible
property. Tangible property will have a physical shape such as machinery, land and buildings,
furniture etc. Intangible property will not have any physical shape, or property, i.e. such as
copyright, trademark, good will or patent. Tangible property can be divided for tax purposes
into real and personal property. Real property is for real estate purposes and personal property
is sub divided into two classifications- personal use and official use. The types of property will
determine the allowable depreciation on it. Personal property will have less life than real
property.
If you believe your income and assets belong to you, then you are only accountable to
yourself, in how you manage what was earned. If you are a believer of God and know that He
is the definitive source and owner of all your personal wealth, then you must hold yourself
accountable to Him for the way you manage what He has given you. (Matthew 25:14-19 NKJV)
tells the Parable of the Talents. Versus 14-19 read “For the kingdom of heaven is like a man
traveling to a far country, who called his own servants and delivered his goods to them. 15 And
to one he gave five talents, to another two, and to another one, to each according to his own
ability; and immediately he went on a journey. 16 Then he who had received the five talents
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went and traded with them and made another five talents. 17 And likewise he who had
received two gained two more also. 18 But he who had received one went and dug in the
ground and hid his lord’s money. 19 After a long time the lord of those servants came and
settled accounts with them. (Matthew 25:14-30 NKJV, (2023). https://www.biblegateway.com)
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References
Spilker, B. C., Ayers, B. C., Lewis, T. K., Weaver, C. D., Barrick, J. A., Robinson, J. R., & Worsham,
R. G. (2024). Taxation Of Individuals and Business Entities (15th ed.). McGraw Hill.
Tarver, Evan. What Is the Tax Impact of Calculating Depreciation? (2021)
https://www.investopedia.com/
Trade or Business Defined, (2023. IRS.GOV https://www.irs.gov/charities-non-profits/trade-or-
business-defined.
(Matthew 25:14-30 NKJV, (2023). https://www.biblegateway.com
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