Depreciation

[MrsBean]

We''re in the process of working on our Business Plan we''ve gotten to the part where we are determining depreciation. I have approximate figures for the cost of our equipment but I still need to find what its useful life span would be. How do I find out these figures ? Or how did you go about figuring depreciation for your business plan?

 

[crema123]

Hello,

Many people do not understand that depreciation is a very real expense. I always recommend to look it over, understand it, and plan for it.

1) Say you live in an area like me where the water quality is horrid, and you buy a new espresso machine for 10,000. I can only assume this new machine will last for 5 years because of all the mineral deposits, etc (just an example ...). It's REAL value after a year is only 8,000. You need to understand that in order to ensure you're making an investment you can get a return on.

2) In the US you will likely depreciate your assets differently for your own financial instruments than your taxes. The taxation department there typically sets the type of depreciation and the amount of years for you - even if the life of your asset is 15 years, you will likely depreciate for 10 years for taxation.

As for planning for profitablilty, depreciation is important to understand for net income.

Please don't ignore this like so many people do, and try to understand it and not rely on an accountant - you will have a better scope of understanding of your business.

I hope this helps. There are many resources available on the web...

 

[MrsBean]

I know what Depreciation is, but what I am looking for is finding out what the depreciation will be for our equipment. Depreciation is very important and that is why I am including it in our business plan.

I have called some manufacturers and some distributors of equipment, and none of them have any idea of what the depreciation is going to be for their equipment. Do I just guess on my business plan? Or do any of you have any idea of how to actually find out depreciation.

 

[ElPugDiablo]

are you looking for the actual life span of the equipment and depreciate the equipment according to that or are you looking for commonly practiced depreciation schedule?

 

[davidsbiscotti]

My machinery and equipment is valued at 35K and it's depreciation is set at 7 years. Then there's something about 25 years, so I'm at a loss. Depreciation is an important tax deduction in business, also in real estate. But, it's only a single, minor deduction. I've got bigger and better deductions to focus on.

Crema123 suggested that you be aware of it and I agree to a point. Ultimately, you have to trust an accountant, just as you would trust an attorney. You can't really be everything for your business and still focus on your product 100%. Soon, you will have to call a mechanic, a plumber, an electrician, etc. and rely on their services for example.

I've found that tax advice is free. Figure out what your property is worth as a basis for depreciation, then call H&R Block for the recovery period.

3/15/08 Update: Error, the 25 year thing was something not related to my equipment. Also, depreciation is a big deal and is not a minor deduction.

 

[davidsbiscotti]

After some online searching and some analyzing of my own taxes (corporate and personal), I've found that there is a standard timeframe and formula when figuring depreciation for business equipment.

If we're talking non-agricultural, which we are, then the standard for business equipment is 7 years.

Other depreciation standards for comparison:
Vehicles are 5 years
Office equipment is allowed 5 years
Office furniture & fixtures is 7 years
Residential rental property is 27.5 years

The way to calculate your annual depreciation is to first figure the value of your equipment, place it in the proper expense category, then figure what it's salvage value will be after the standard time frame, subtract that from the value, then divide the difference by the allotted number of years. This is the more common procedure.

E.g. :
Current value of equipment: $10K
Category is 7 year property
Salvage value after 7 years (estimate depending on your variables) is 2K
10K - 2K = 8K
8K divided by 7 years = $1,143.86 annual depreciation

Maintenance and repairs can be fully deducted as business expenses for the year they were incurred. But that's not a depreciation issue.
My accountant doesn't use the salvage value. There's something about using the full purchase price and allowing it to fully expire after 7 years. If I sell my equipment or business however, I will incur the tax liability on the selling price. If you already figured in the salvage value, then your tax liability on the sale expires after the 7 year mark.

These are a few online resources I used for the above info:
http://taxguide.completetax.com/text/c60s15d595.asp
http://en.wikipedia.org/wiki/Depreciation
http://www.nolo.com/article.cfm/cat.../03E7A8D4-EB53-4711-97F91991D9A8468B/213/ART/

 

[davidsbiscotti]

Another option is to completely write off the machinery and equipment purchase for the year incurred, up to over 100K. You don't have to spread the purchase price through several years. This may be helpful if you see that your profit is especially high during the year of the purchase. In the 10K example above, you could use the entire purchase price as a tax deductible business expense if needed. It's just more common to spread it out.

BTW - I'm finding that my real estate provides for a much better financial investment than my bakery. This is good stuff. Coffee shops and other small businesses can benefit from this topic, so if anyone has info or experience related to depreciation and/or other tax related info, please add to this thread.

 

[ElPugDiablo]

Ed,

The 7 year straight line depreciation method is what I use, but you can, I think, also use an accelerated schedule so that you depreciate most in the first year. The rationale being new equipment lost most of its value the moment it is out the dealer's warehouse. Either method is allowable by the IRS, but accountant is best suited to figure which is best for each business.

 

[davidsbiscotti]

Thanks EPD, I do like the 7 year straight line method better.
I agree that you should leave it up to your accountant. I've been working with the same accountant for years and have always trusted her. Because of this topic on depreciation, I recently spent a whole evening looking over her work and was pleased to see that she's on top of things.

 

[neglid]

This IRS publication explains in great details the depreciation methods.

http://www.irs.gov/publications/p946/index.html