Media13.com is a source of free to republish or reprint articles, writers may submit your articles in our database as long so you agree that your article will be freely republish or reprint by other.

Submit Article

Search our database

Received article from us.

Name

Email Address

Friends

Bollywood News
Link building
Article submission service
Freelance Writers
Laser hair removal

We have been looking for freelance writers. Contact us

Understanding Depreciation: It May Be More Simple Than You Think by John Day

Depreciation is defined as a portion of the cost that reflects the use of a fixed asset during an accounting period. A fixed asset is an item that has a useful life of over one year. An accounting period is usually a month, quarter, six months or one year. Let’s say you bought a desk for your office on January 1, for $1000 and it was determined that the desk had a useful life of seven years. Using a one year accounting period and the “straight-line” method of depreciation, the portion of the cost to be depreciated would be one-seventh of $1000, or $142.86.

Most non-accountants roll their eyes and shudder when the topic of “depreciation” comes up. This is where the line in the sand is drawn. Depreciation is far too complicated to try and figure out, or so it seems to many. But is it really? Surely the definition of depreciation mentioned above is not that difficult to comprehend. If you look closely you will see that there are five pieces of information you must have in order to determine the amount of depreciation you can deduct in one year. They are:

-The nature of the item purchased (the desk).

-The date the item was placed in service (Jan 1).

-The cost of the item ($1000).

-The useful life of the item (seven years).

-The method of depreciation to be used (straight-line)

The first three are easy to figure out, the second two are also easy but require a little research. How do you figure out the useful life of an item? Let me regress for a moment. There is “book depreciation” which is based on the real useful life of an item, and there is the IRS version of what constitutes the useful life of an item. A business that is concerned with accurately allocating its costs so that it can get a true picture of net profit will use book depreciation on its financial statements.

However, for tax purposes the business is required to use the IRS method. The IRS may have shorter or longer useful lives for fixed assets causing a higher or lower depreciation write-off. The higher the write-off, the less tax a business pays. The long and short of it is that you end up having to create a book financial statement and a tax financial statement. So, most small businesses that aren’t concerned with a precise measurement of their net profit use the IRS method on their books. This means that all you have to do is look in IRS Publication 946 to find the useful life of a particular item.

The last piece of information you need is found by determining the method of depreciation to use. Most often it will be one of two methods: the “straight-line” method or an accelerated method called the “double-declining balance” method. Let’s briefly discuss these two methods:

Straight-line

This is the simple method mentioned in the definition above. Just take the cost of the item, divide it by the useful life and you’ve got the answer. Yes, you will have to adjust the depreciation for the first year you placed the item in service and for the last year when you removed the item from service. For instance, if your depreciation for one year was $150 and you placed the item in service on April 1 then divide $150 by 12 (months) and multiply $12.50 by 9 (months) to get $112.50. If you removed the item on February 28 then your deduction will only be $25.00 (2 x $12.50).

Double-declining balance

The idea behind this method is that when an item is purchased new, you will use up more of it in the earlier years of its life, therefore, justifying a higher depreciation deduction in the earlier years. With this method, simply divide the cost of the item by the useful life years as in the straight-line method. Then, multiply that result by 2 (double) in the first year. The second year, take the cost of the item and subtract the accumulated depreciation. Next, divide that result by the useful life and multiply that result by 2, and so on for each remaining year.

But, wait! You don’t have to do this. The IRS provides tables that have the percentages worked out for each year of the two different methods. Not only that, they have set up special first year “conventions” that assume you purchased your depreciable fixed assets on June 30. This is called the one-half year convention. The idea behind this is that you may have bought some items earlier than June 30 and some after that date. So, to make it easy to figure out, they assume the higher and lower depreciation amounts will all average out.

Actually, the IRS doesn’t even call it depreciation anymore. They call it “cost recovery”. Let’s face it. This is a political tool. Congress giveth and taketh away. They have been playing with this system for years. If they want to stimulate growth in business they will shorten the useful life of assets so businesses can attain a higher write-off. If they are not in the mood, they will extend the useful life of an item. A good example is the 39 years set for the useful life of commercial property. This means that if you lease a building for your business and make improvements, those improvements have to be depreciated over 39 years. Now congress is working on a bill to drop that down to 15 years for leasehold improvements.

Before December 31, 1986 we had ACRS or Accelerated Cost Recovery System. Currently, we have MACRS or Modified Accelerated Cost Recovery System. Every time congress tweaks the rules they give it a different name.

Keep in mind there are different schedules for different properties. For instance, residential real property is depreciated over twenty-seven and one-half years and non-residential real property is depreciated over thirty-nine years. In addition, if more than forty percent of your total fixed asset purchases occurred in the last quarter of the year, then, you must use a mid-quarter convention. This convention assumes that your purchases made in the last quarter of the year were made on November 15. This prevents you from buying a big expensive piece of equipment on December 31 and treating it as though it were purchased on June 30 and gaining a larger depreciation expense.

Understanding how basic depreciation works can be valuable to the small business owner because it helps to know the tax implications when planning for capital equipment purchases.

Author Info:

John W. Day, MBA is the author of two courses in accounting basics for non-accountants. Visit his website at http://www.reallifeaccounting.com to download for FREE his 3 e-books pertaining to small business accounting and his monthly newsletter on accounting issues. Ask John questions directly on his Accounting for Non-Accountants blog .

Latest 20 articles

Why Should I Hire a Seattle Real Estate Attorney? In every real estate transaction there are a wide variety of legal issues that must be taken care of. Contracts should always be reviewed by an attorney who understands the nuances of real estate law. But there are also state specific State laws to contend with. A Seattle real estate lawyer deals with a large number of State legal issues related to acquiring, financing, developing, managing, co

California IT Professionals – In Need of California Class Action Attorneys! It is hard to miss the wave of California wage and hour litigation related to California IT professionals and Computer employee overtime that has been sweeping California recently. Even the largest software and computer companies have paid out millions of dollars to employees wrongfully classified as “exempt”, or in other words, not entitled to overtime. A layperson would believe that with pr

Protect Your Mental Health With A Payday Loan Just when you thought that things couldn’t get any worse, more banks went under. More countries are declaring economic crisis. It seems that the world’s financial problems are bound to get worse. Even if you do not have considerable investments in various banks, I am sure that you are feeling the stress that results from these economic upheavals. I sure am. I am just an average person, with a

Free Bulk SMS services People are getting very busy these days without having enough time to talk unless it is very important. Mobile SMS have supported this need to contemporary times as now people do not want to call and enter in the unproductive conversation before coming up to the actual issue. SMS provides you the benefit to come straight to the point and also saves money. What if you get this totally free?

HELP – I Have IRS Levy Problems! If IRS collection notices are ignored, the IRS is forced to collect from taxpayers by force. They do this with their dreaded IRS levy. By law, the IRS has the right to levy bank accounts (IRS bank levy), garnish your paychecks (IRS wage levy), or even seize your assets. But you do not have to let the IRS bully you or your family. There are ways to stop an IRS levy. The first step is to know the

Why Use Professional Tax Debt Help? Good IRS tax relief is hard to find and for people with complicated tax issues, it is an absolute necessity. But how do you know which tax reduction firm is the best one to try? How can you be sure you're going to get the tax debt help that you need? And why is it so vital to receive help from professionals? Settling Your IRS Tax Debt For Less When your IRS tax debt is spiraling out

IRS Settlement – Can You Really Settle Your IRS Tax Debt for Less? It's possible to settle your IRS tax debt, but it presents a challenge. Proving you can settle your tax debt for less is a daunting experience. You have to contend with pages of IRS paperwork rife with technical terms. Settling tax debt is indeed a reality and it can be done. However, there's a lot you need to know before you attempt to settle your IRS tax debt. Rebuking the Lies - The

IRS Tax Relief – The Most Popular IRS Tax Relief Solutions Tax law provides many solutions for resolving tax debt. But if you were to contact the IRS directly, they would only alert you to one solution, and that's paying the tax debt in full. Here are five popular IRS tax relief solutions you should know about to be more informed. IRS Tax Settlement It is possible to settle your IRS tax debt. But there are some pitfalls you need to know. Fi

Hire the California Labor Board or California Labor Law Attorneys - You Decide With a downturn in the economy, many employers are cutting back on payroll. Unfortunately, some employers are reducing payroll costs by violating the California overtime laws. When this occurs, employees have essentially two options to recover their California overtime pay: the California labor board, or hiring California labor law attorneys. Although the California Labor Board is a commonly

Hiring a Car At Bangalore - Is More of Necessity Than A Luxury Your sedan is probably the best materialistic thing that you own and while going to a new place, that is what you ought to miss the most but if you are going to Bangalore then you probably have a option of getting a replacement so that you don’t miss it all that most because it will be as comfortable and as obedient as your own car and the Bangalor

How to Choose a Car Rental Company in Bangalore Bangalore is a place that lists one of the best as far as infrastructure is considered in India as it is the IT hub of India and thus the roads to drive is atmost pleasure and thus if Bangalore is the destination that you are planning for next then the best way to move around is by hiring a car. To hire is car is very simple if it is in Bangalore because there are some very good car rental compani

Car Rental Companies in Bangalore If you are travelling to Bangalore and hiring a car is what worrying you then you can be relaxed because this is one service that you will easily get in Bangalore and that too at very affordable and economic prices. Basically there are really good car rental companies in Bangalore available for renting the cars and you can either book in advance or go there and hire a car for yourself. Also, you h

Tips to Hire a Car in Bangalore One thing that most of us agree is that the fact that the most comfortable way to move around at any place is by your own vehicle but what if you are going to a new place, it is not possible to carry your vehicle along with you and you actually cannot trust too much on the public transportation system and at such situation the best possible option is to hire a car for yourself, at some places it c

Hire a Car: Comfortable Way to explore Bangalore If you are out to a new place than the first thing that comes into your mind is a comfortable accommodation and then the second one on the priority list is a comfortable way to move around in the city and if Bangalore is your preferred location, than you’ll be having options for both of the facilities, but if we specifically speak about the second one that is moving comfortably than the best opti

Car Rental – A convenient mode of transport in Bangalore Bangalore, a place which probably is considered one of the best places in India as far as infrastructure is considered and reasons are many for that, one is because of the IT hub that it is and also because it is one of very good places if you are considering holidays and because of this very good facility provided for the people visiting Bangalore is that you have many options in case if you are

Rent a Car in Bangalore: Take the Right Decision In today’s world, time is money; the more you save it better it is for you. And in that case if you are going to another place where you are not too familiar with the surroundings, then instead of wasting time on travelling by locating and travelling by public transport is to hire a vehicle for yourself. This helps in many ways, one it saves on time and also it moves at your pace so you don’t have

Bangalore Car Rental: Save Your Time When you are at an unknown place or for that matter known place and time is your major factor of concern then, the best way to save on time is by having your own vehicle for conveyance. This gives you freedom to move at your own pace and wish. And for that matter if you are at a place like Bangalore where the roads are so beautiful that it is a sheer pleasure to travel through your own rented vehi

Best Package Tours to Kerala Kerala – God’s own country which means heaven for those who appreciate the real untouched, naïve beauty of nature and if you are one of those than consider Kerala as the option for you next holiday. Kerala gives an option to explore the nature to the fullest because it has all the places where you can explore the nature be it scenic beaches or the hill stations or the ethnic culture, just everythi

Kerala Tour: A Getaway from Regular Stress If you are tired of daily stress and meetings and looking for a getaway so that you snatch some time for yourself with your loved one’s than Kerala holidays is the perfect is the perfect thing for you. Its calmness and closeness to nature would give you that much needed peace of mind that you always wanted. Also along with enjoying the beauty of this scenic place on your holidays to Kerala you can

Kerala Tour Packages: Have A Look If holidays are on your mind, then Kerala is one option that you cannot choose to neglect. Because Kerala is one place that offers you all from calm and serene natural places to exciting sports to exotic beaches and also beautiful hill stations, everything provided at one place which is also known as god’s own country. And obviously such wide range of activities would make it a tough job to cover