See Where Claiming Depreciation Can Help You Save
Many business owners just don’t want to deal with depreciation: it seems so complicated, and hiring someone to calculate it for you seems more expensive than what you could save.
Keep in mind, though: if you don’t claim depreciation now you are choosing to forgo that deduction later. But does that mean it’s right for you?
According to IRS Publication 946, the official go-to for all things depreciation, these qualify for depreciation claims:
- Property you own (for example: a van you only use for your business, or a rental property whose mortgage you have acquired and that you will draw income from)
- Property used in your business or income-producing activity. This not the same thing as inventory. Inventory are products you stock in order to sell, and your property is only eligible for depreciation if you use it as part of your business and because of use, its retail value goes down.
- Property having a determinable useful life. This means that items necessary for your business are proven to depreciate over time (though items such as technical books that will be outdated in a year cannot be claimed).
When claiming accelerated depreciation you are basically saying that the property in question depreciates more quickly at first.
For example, if you have a property or asset worth $10,000 and you claim 20% depreciation rate the first year you would be left with $8,000. The next year you would claim 20% of $8,000, not the original $10,000 price. This continues each year until you have deducted the asset’s total value (minus, if applicable, a salvage fee).
Remember, all of these depreciation methods are aimed at helping your savings goals over the long term.
Straight Line Depreciation
The straight line method of depreciation is by far the simplest method of depreciation. It’s so easy: take the cost of an asset, subtract the projected salvage value, then divide by the number of years it should last. Viola! You then just deduct that amount every year.
Let’s say you have a $20,000 asset with a $2,000 salvage value that is expected to last 15 years.
$20,000 – $2,000 = $18,000.
$18,000 / 15 years = $1,200 / year
Just remember that straight line depreciation is most useful when you have an asset that will depreciate at an even rate over time!
Units of Depreciation
Let’s say you have an item you use in your production process that doesn’t fit into either of these categories. You can instead calculate its depreciation based on how much it can produce instead of how long it can last.
You will need some kind of proof of how many units the item can produce before it loses its life. If it is capable of producing 1,000,000 units total and it produces 300,000 units the first year then you can claim that 30% of its original cost as a depreciation expense. Neat, right?
Is It Worth It?
In our straight line depreciation projection we saw that claiming depreciation of a $20,000 asset purchase can save a business owner $1,200 a year at least. Is that an amount you would be interested in saving? Are you thinking of other assets and properties that might be declining in value as you read this right now? Are you dreaming of a fat tax return yet?
We at Arrow Cloud think that every dollar you save is a dollar of profit. Find yourself a business accountant who can help you organize your financial statements claim depreciation — and thus start saving — today!