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Mastering the Art of Depreciation: Choose the Perfect Tool for Your Business

By: Brooke Dunkelbeck

Depreciation: the unsung hero of every business's accounting saga. It's the silent force that ensures your financial records dance to the rhythm of balance, a vital element in the complex symphony of profit and loss.

Yet, for all its importance, selecting the right depreciation tool can be daunting. Fear not! We're here to turn this mundane topic into a thrilling expedition through the world of financial wizardry.

The Toolbox Dilemma: Pencil vs Spreadsheet vs Specialized Software

Selecting the right tool for the task at hand is critical.

Pencil, paper and a calculator might be the most cost-effective, but they crumble under the weight of complexity.

Excel steps in as the middle ground. Although Excel can be a powerful tool offering automated calculations, it is vulnerable to human error.

Then, there's the champion among the tools ― specialized software packages like Sage Fixed Assets. These programs not only manage your assets' lifecycle, but also juggle various depreciation methods and transactions effortlessly.

Many ERP systems ― such as NetSuite and Microsoft Dynamics GP ― include a fixed assets module and integrate with the overall accounting system. These programs also have the added benefit of applying updates for changes in tax law. While this option is reliable, there is a financial cost and a learning curve to overcome, just like with any new piece of software.

As you consider which option is right for you, you should involve your accountant in the decision.

Let’s dig into the factors you should consider as you explore your options for managing depreciation in your organization.

Choosing a System: Factors to Consider

1. The Burden of Multiple Books

Financial statements kept on GAAP (generally accepted accounting principles) typically have different methods and amounts compared to the tax reporting basis. This leads to multiple sets of books for fixed assets.

To further complicate the process, states have different requirements than the federal government. It’s common to see three books for a business that operates in just one state. The work required to keep track of this is burdensome, making the appeal of a specialized software package obvious.

2. Taking Advantage of Tax Incentives

Since the government dictates how depreciation is calculated when submitting tax returns, they can manipulate this calculation to create incentives for business owners to invest in machinery and equipment sooner rather than later.

Bonus depreciation and Section 179, for example, are two tax incentives that allow depreciation expense to be taken in the year of acquisition, which decreases the amount of taxes owed in the first year, but increases the amount owed in subsequent years compared to the normal depreciation methods.

While this calculation is integrated into specialty software, it’s more difficult to track in manual and spreadsheet-based systems. It is important to note some states do not recognize these tax incentives creating differences that must be tracked differently for certain states. Thus, filing in multiple states can lead to even more sets of books for property.

3. Complexity of Grants and Contracts

Commercial enterprises face different challenges than nonprofit organizations. Many nonprofits do not need to contend with all the issues facing commercial entities with multiple books and frequently use the simpler method of straight-line depreciation.

Nonprofits do have other concerns, such as keeping track of the assets to comply with grants or contracts. These requirements create another layer of complexity to the process.

4. Conversions of Existing Systems

Converting your existing system to another system presents some challenges because all the information must be transferred and validated. Specialized software packages have tools to help ease this process, but sometimes all the information must be input from scratch.

Get Ready to Master the Art of Depreciation

Feeling overwhelmed by depreciation challenges? We're here to help simplify the complexities and transform depreciation from a headache into a strategic advantage for your organization. We can work with you to find the best fit for tracking assets and depreciation.

Need Help?

Contact us online or call 800.899.4623.

Published October 25, 2023

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