In yesterday’s blog I mentioned asset acquisition and depreciation. Just to backtrack a bit, when you start up your business you will decide whether you will use the cash method of accounting or the accrual method. Most small businesses (and artists) use the cash method. What this means is that you will include your income and your expenses in the year that you actually pay for them. The accrual method is a little more complicated. You become liable for your expenses when they occur and you need to report income in the year it is earned. The accrual method is mostly used by large businesses and those with significant inventories.
Even though you have chosen to use the cash method, any assets that meet the requirements for depreciation or amortization will not be fully expensed at the time of payment or purchase. This is an exception to the cash method of accounting that is required for tax returns. There is a Form 4562, Depreciation and Amortization, that you will complete along with your Schedule C, Profit or Loss from Business. On this schedule you will list your property, its value, the term for depreciation, the method, etc. Again, this is another good reason to have a good tax accountant even if you are keeping immaculate records. Property owned can have different classifications regarding its useful life which determines how much of an expense you can take in one year.