Can i amortize land

Under the accrual method of accounting, a business that purchases an asset doesn't record the full cost as an upfront expense. Rather, it spreads the cost over the useful life of that asset, reporting a portion of the expense each year. Depending on the asset, this accounting treatment is called either amortization or depreciation.

These concepts are as applicable to small businesses as they are to large enterprises. Though depreciation is strictly an accounting maneuver, it's helpful to think of it as an asset declining in value as it gets "used up" over the years, even if it doesn't wear out in a conventional sense -- a computer used in a home-based business is one example.

One tangible asset never gets depreciated, however: land. Accounting standards consider land to have an indefinite useful life, so it cannot be depreciated. If you were to buy a plot of land and build a store on it, the construction costs could be depreciated; the cost of the land could not. Amortization works the same way as depreciation. The difference is that amortization is used for intangible assets rather than physical property.

A common example is a patent. Say you own a fabricating shop, and someone brings you an innovative tool that he has designed and patented. Other potentially amortizable intangible assets include a purchased customer list since such lists eventually become out of date or a trade name that you acquired when you bought out a competitor and that you plan to eventually phase out.

In other words, the depreciated amount expensed in each year is a tax deduction for the company until the useful life of the asset has expired. For example, an office building can be used for many years before it becomes rundown and is sold. The cost of the building is spread out over the predicted life of the building, with a portion of the cost being expensed in each accounting year. Depreciation of some fixed assets can be done on an accelerated basis , meaning that a larger portion of the asset's value is expensed in the early years of the asset's life.

For example, vehicles are typically depreciated on an accelerated basis. Depletion is another way the cost of business assets can be established. It refers to the allocation of the cost of natural resources over time. For example, an oil well has a finite life before all of the oil is pumped out. Therefore, the oil well's setup costs are spread out over the predicted life of the well.

The two basic forms of depletion allowance are percentage depletion and cost depletion. The percentage depletion method allows a business to assign a fixed percentage of depletion to the gross income received from extracting natural resources.

The cost depletion method takes into account the basis of the property, the total recoverable reserves, and the number of units sold. With depreciation, amortization, and depletion, all three methods are non-cash expenses with no cash spent in the years they are expensed. Also, it's important to note that in some countries, such as Canada, the terms amortization and depreciation are often used interchangeably to refer to both tangible and intangible assets.

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Cost Recovery Depreciation and amortization are both parts of the Internal Revenue Service's cost recovery system. Depreciation vs. Amortization Depreciation is the method by which you recover the costs of tangible assets. Depreciating Rental Real Estate While the land under your rental real estate isn't depreciable, the building and any improvements that you make to it are.

Costs You Can Amortize When you first buy a rental property, your loan and acquisition costs get added into the cost basis and cannot be amortized, although they do get added to your basis for depreciation. References TransLegal: Amortization vs.

Depreciation Steven J.