Understanding equipment depreciation can help you decide how to finance your company’s next major purchase. This knowledge applies to all kinds of businesses such as construction companies, medical offices, restaurants, or other types of businesses requiring hard assets. For some, financing a purchase may be the best option. For others, you may prefer equipment leasing. Find out everything you need to know about equipment depreciation, so you can make the best decision for your company.
What is Equipment Depreciation?
The IRS allows business owners to take an income tax deduction on the depreciation of most tangible property. While the deduction doesn’t include land, it can be used on things like equipment, company vehicles, furniture, and even computer software.
In order to calculate the deduction for a specific piece of equipment, you need to determine its value and also its useful life. You can certainly plug your numbers into a depreciation calculator, or use a seasoned accountant to help you with your figures.
To get a general idea of your depreciation deduction, follow these simple steps:
1. Determine the asset’s useful life. This is how long you can reasonably expect the equipment to work for your business.
2. Next, find the salvage value, or the amount for which you could sell your asset at the end of its useful life.
3. Subtract the salvage value from the cost of the equipment, then divide by the number of years of useful life.
There are plenty of resources available to help you find figures for asset types specific to your industry, and always consult your accountant for more precise calculations.
Requirements to Qualify for Equipment Depreciation
In order to qualify for the depreciation tax deduction, you must own the equipment. It also has to be used specifically for your business. If you use the equipment for any personal reasons, you can only deduct a percentage of the depreciation value. Finally, the IRS requires a minimum useful life of one year. Anything that doesn’t last a full year cannot be used towards your deduction.
Unfortunately, you cannot use this deduction for leased equipment. Instead, the lessor gets to claim the deduction since they technically own the equipment. You can, however, oftentimes qualify for a lower APR for equipment leasing than you would with a traditional purchase loan.
Factoring in equipment depreciation can help you determine the best way to acquire your next business asset, such as a cash purchase, financing, or leasing.