Depreciation Notes

Class Depreciation Notes

When to depreciate? when it meets the following criteria.

  1. 1. Must be used for business purposes.
  2. 2. Determine life longer than a year
  3. 3. Decaying, wearing out, or losing value to the owner

Depreciation Rules

  1. 1. Almost all tangible property can be depreciated
  2. 2. Land is not depreciated
  3. 3. Do not depreciate; factory inventory, leased assets, and equipment used to make capitol improvements.
  4. 4. Be careful mixing business and personal.

NOTE: IRS is picky about Iphones, home offices, and laptops for small businesses.

What you need to know

  1. 1. Service date (not necessarily the purchase date) - mid year convention, mid quarter convention, mid month (all real estate) convention
  2. 2. Cost basis
  3. 3. Salvage value - what's it worth at the end of its useful life. goes down to zero
  4. 4. Service life - how long stuff lasts (short lives, rapid depreciation means more money now)
  5. 5. Method - straight life

Book Notes
3rd edition, chapter 10

Cost basis - of an asset represents the total cost that is claimed as an expense over an asset's life. in other words its the sum of the annual depreciation expenses.

Two Depreciation Methods

  1. 1. Book - intended for financial reports, such as income statements and balance sheets. Uses Straight Line calculation.
(1)
\begin{equation} Dn=(I-S)/N \end{equation}

Dn = Depreciation charge
I = Cost of the asset including installation expenses.
S = Salvage value at the end of the useful life
N = Useful life

  1. 2. Tax - for the purpose of calculating taxes. Uses the Modified Accelerated Cost Recovery System(MACRS). Under MACRS the salvage value is zero. It is broken up into 8 recovery periods; 3, 5, 7, 10, 15, 20, 27.5, 39 year.
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