Depreciation is the gradual de-valuing of assets over time. Assets that are purchased for your business will slowly depreciate in value, but you can count that depreciation as a tax deduction.
Below is a table outlining the various depreciation methods, as well as a list of frequently asked questions about depreciation expenses.
Straight Line Depreciation
The same expense amount is deducted every year for the entire useful life of the asset.
Depreciation Expense = (Cost – Salvage value) / Useful life
Double Declining Balance Depreciation
A greater value is deducted during the earlier years to show an increased depreciation during the asset's most valuable years.
Expense = (100% / Useful life of asset) x 2
Units of Production Depreciation
Depreciation is based on the total hours that the asset is used, or that total units that it produces.
Depreciation Expense = (Number of units produced / Life in number of units) x (Cost – Salvage value)
Accelerated depreciation that deducts more in the earlier years and is calculated using the time that the asset has been owned.
Depreciation Expense = (Remaining life / Sum of the years digits) x (Cost – Salvage value)
What is a depreciation tax shield?
A depreciation tax shield shields businesses from income tax by allowing them to write off a certain percentage of their depreciating assets. Depreciation of fixed assets could include cars, computers or tools that are owned by and used for your business. This is sometimes called recoverable depreciation.
Is software depreciation a legitimate expense?
The depreciation of software can be deducted as an expense over a 36-month period after it is purchased. Software depreciation is not applicable when a new computer is purchased and the software comes pre-loaded on the computer. You must purchase the software separately in order to count it as a depreciating asset.
Where can I find the latest depreciation rates and rules?
The IRS publishes updated depreciation limits and rules on their website. You can read the latest information by going to www.irs.gov/publications/p946.
What is a depreciation schedule?
A depreciation schedule shows the life length of a particular asset and how much it will depreciate in value every year for the duration of that lifespan.
Where can I find a depreciation calculator?
You can use the calculator on financial-calculators.com/macrs-depreciation-calculator to determine the depreciation of your business property by inputting the type of asset, the depreciation method, etc.