Right from the minute you make an equipment purchase, its value begins to depreciate, and it’s important to know how that depreciation works, in order to account for it in your business management. Here’s what you need to know about equipment depreciation.
Declining balance depreciation
This method of accounting for depreciation assumes a larger depreciation amount during the first year, and lesser amounts in each of the subsequent years. As an example, if you were to purchase a front loader that costs $100,000 and depreciates at a rate of 20%, the first-year depreciation would be $20,000, the second year’s depreciation would be $18,750, and so forth.
This is one of the most common methods for calculating your equipment’s depreciation, and as you might expect, the amount of depreciation remains constant throughout the life of the equipment. To use the previous example, a $100,000 front loader depreciating at 20% annually would depreciate by $20,000 in each of the five years after purchase, until it was fully depreciated.
Double declining balance depreciation
From the beginning of the time an equipment purchase is made, it can be depreciated at twice the value of straight-line depreciation. This is of course an accelerated version of depreciation, which would be depicted in accounting as a significant expense, but which has the advantage of providing greater tax relief.
Estimated useful life of your equipment
The depreciation method which you choose for your accounting books will often depend on the estimated useful life of that equipment, which is defined by the IRS. Each category of business equipment will fall into a specific depreciation recovery period, and the one which relates to your particular equipment will help to determine which depreciation method should be used.
Does your business have the equipment it needs?
If your business would benefit significantly by having new equipment, we may be able to assist with financing that critical equipment. Contact us at Business Capital Providers so we can discuss some alternatives for financing that important business equipment you need.