Depreciation is inevitable, but it can frequently take us by surprise. As our assets degrade in quality so, for example, might our productivity or even the quality of our product, yet the process is often so gradual that we are able to live adequately in denial until things go seriously wrong. However, one party which does not ignore depreciation in the least is the IRS. Depreciation alters the worth of your business, in some cases dramatically so. It can also alter the taxes you are asked to pay. An asset’s depreciation can alter the cost of your expenses and throw your entire financial plan out of whack. Depreciation also plays a role in how much one can deduct as the result of the acquisition of a new asset. By calculating the depreciation the asset will endure every year the amount that can be deducted can be identified. Generally, depreciation is seen as a bad thing, but its really not. It’s a guarantee, one which will alter the reality of your business in many ways, but it’s unavoidable and it has its benefits too. Still, planning for its existence and its effect is incredibly important. This is why it’s essential that you enlist the help of AFS Taxsavers in the creation of a “depreciation schedule” to help you map out how quickly an asset will depreciate, calculating its estimated worth throughout time. In this way, you will be able to anticipate the effects of depreciation.
How Is Depreciation Calculated?
There are three major ways:
- Straight-line depreciation: Using this method, depreciation is equated to an asset’s “salvage value,” or the amount it will be worth following its drop in worth over time. This method ascribes fixed rates of depreciation to assets, assuming that it will decrease in value by the same amount each year. Therefore, the asset is devalued not based as much on its actual state as on its hypothesized state.
- Declining Balance: Another way to calculating depreciation which relies on fixed, hypothesized amounts, the “declining balance” method assumes that an asset with lose value more quickly earlier on, evening out in quality more in its later years. While not as common, the estimates calculated through this method, which rely on the net book value of the asset in question, are thought of as a bit more realistic than those generated through “straight-line depreciation.”
- Activity: Unlike the other two methods, “activity” is a very personalized approach to calculating depreciation which is based on actual usage, say the cycle count of a machine for example. For every benchmark which is passed, every cycle count to continue the above example, the asset will depreciate a little bit more. At the end of the fiscal year, the amount of activity the asset has endured will determine the amount of depreciation reported.
In the end, there’s no doubt that your specific partnership will have unique tax rules which will dramatically shape the financial obligations of each partner. Rather than trying to keep such a complex matter straight yourselves, why not call AFS Taxsavers? We’ll make sure that your taxes are filed with complete accuracy that neither partner will ever over or under-pay.