Can Assets Depreciate in LLCs?

Assets still depreciate under LLCs.

Amortization, or depreciation as it is still sometimes called, can and does occur under limited liability companies. Depreciation is the drop in value that assets undergo in the course of their useful lives, including concepts as diverse as obsolescence and the normal wear and tear that happens through use. Since LLCs are a classification of business with special legal protections and income sharing schemes that have little or nothing to do with how their assets are accounted for, their accounting statements still need to include depreciation.

Limited Liability Company

Limited liability companies or LLCs are a class of businesses that blend the qualities of corporations and partnerships. Like corporations, they offer their owners limited liability, meaning that owners do not bear responsibility for the legal liabilities incurred by LLCs. Like partnerships, they offer their owners single-taxation income, meaning that LLCs pay no income tax but rather pass it on to their owners who then pay taxes on their portions of the LLCs' earnings. Neither of these qualities affect the accounting rules and practices for asset depreciation.

Accounting Basis

Almost all accounting is done on an accrual basis, meaning that costs and revenues are not recognized on a cash basis. Instead, costs are recognized when incurred while revenues are recognized when earned and realizable, where realizable means that there is a reasonable expectation that the amounts will be paid. For example, if a business sells services to the amount of $100 to be paid next month, the business would recognize revenues of $100 in the current rather than next month under accrual-basis accounting. Accrual basis accounting is done in order to depict a business's financial circumstances with greater truth and accuracy and it requires the recognition of certain revenues and expenses that are not always immediately obvious.

Depreciation and the Matching Principle

One such expense is depreciation. As mentioned in the introduction, depreciation is the decrease in the resell value of assets resulting from a number of sources ranging from obsolescence to simple wear and tear. It is accounted for because of the matching principle in accrual basis accounting, which states that costs should be matched to the same time period as the revenues that their occurrence helped produce. Since depreciation occurs as a result of assets being used in business operations, it is recognized each month in order to match with those same revenues. Nothing in LLCs' unique qualities affects this relationship.

Depreciation Tax Credit

Depreciation expense can be used on tax forms as a tax credit. LLCs can file for federal returns as either partnerships, sole proprietorships or corporations so long as they meet the basic qualifications. In almost all cases, however, depreciation tax credits are not lost because the LLC pays no income tax but rather passes it on to the LLC owners.

References

• IAS Plus: IAS 16, Plant, Property, and Equipment
• IAS Plus: IAS 18, Revenue