All About Equipment Depreciation

equipment depreciation explained

To keep your small business operating as smoothly as possible, it needs to have a sound business plan and the best employees you can find. It also needs the right equipment. However, investing in things like furniture, computers, cloud software, machinery and vehicles can be difficult if you have a limited budget. In addition, buying or financing business equipment is just like buying a car – its value drops the minute you acquire it.

In addition, the longer you own a piece of equipment, which is referred to as a fixed asset, the more its value decreases. As you know, this is called depreciation, and it can affect your business taxes and methods of accounting. This blog post from Balboa Capital will help you learn all about equipment depreciation.

Straight-line depreciation.

As mentioned above, all of your business equipment will depreciate over time. Calculating the decline in the “life” of your business equipment is a relatively simple process. It is important to note that depreciation is viewed as an expense for your business, and the decrease in your equipment’s value needs to balance out on your accounting sheet. Straight-line depreciation is one of the most common methods used to calculate business equipment depreciation.

Calculating straight-line depreciation of your business equipment is simple. You take the purchase price of your business equipment and estimate its depreciation each year with an equal percentage. For example, let us say your business acquired a high-end digital printer two years ago for $10,000, and it depreciates in value 20% each year. When it comes time to do your accounting this year, the printer cannot be listed on your balance sheet with a $10,000 value because it depreciates $2,000 annually.

Declining balance method.

Another way to calculate the depreciation of your business equipment is with the declining balance method, which is more complex than the straight-line method. This method assumes a larger depreciation starting during the first year of the business equipment’s life, and smaller depreciation amounts each year thereafter.

For example, if your small business gets a new piece of machinery for $100,000 that depreciates 20% each year, the deduction is $20,000 in the first year, $18,750 in the second year, and so on.

Double declining balance method.

The double declining balance method is a more accelerated form of depreciation. From the start, the equipment is depreciated at twice the straight-line depreciation rate. For example, a large-format printer worth $20,000 that lasts five years would be depreciated at 30% in year one (versus 15% for straight-line) and 30% of the balance for ensuing years.

Impact on equipment acquisition.

Prior to making a capital equipment purchase, it is a good idea to consult with your accountant to find out the “estimated useful life” of the equipment, as defined by the IRS. There are different depreciation recovery periods for each category of equipment. For example, computers have a five-year depreciation recovery period.

Your accountant can also determine if it makes sense for you to finance equipment, and let you know if the equipment you want qualifies for the Section 179 tax deduction. From a cash flow perspective, equipment financing is attractive option. It enables you to get new or updated equipment easier and faster.

The information in this blog post has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, investing or accounting advice. You should consult with your accountant, lawyer or tax advisor before making any business decisions or moving forward with business funding.