How to Calculate Depreciation for Tax Purposes


    Running a business requires additional knowledge when purchasing tangible assets that are owned by the company. The item can decrease its value over time. In some instances, the value of the asset goes down when you plan to resell it. Not getting the original price over the cost you paid for this asset is known as depreciation. 

    On a different perspective, tax depreciation requires you to spread the asset’s cost over the estimated lifespan and use. Calculating tax depreciation can be complicated without following the fundamental guidelines. In short, depreciation is the value of your business’s asset measure by life usage. But how to effectively and accurately apply it into your business. 

    What Is Tax Depreciation?

    With time, the value of any tangible asset acquired by a business or company changes and slowly decreases. This is what we call depreciation. Fortunately, businesses have ways to recover their expenses on these physical properties by taking down notes off the cost against the assets’ useful lifespan. 

    To further understand the process, the method is identified to the assets remaining value over time. The cost is affected due to the usage or when the investment becomes obsolete. Some of these assets can be your company machinery, equipment, plants, vehicles, or any tangible property. While depreciation and taxes are vital factors when investing in real assets for your business, understanding how the process works allows you to weigh your decisions before purchasing any company asset. 

    For example, suppose your business owns a vehicle used for various purposes. In that case, the asset alone loses value with frequent use, how it was driven, its current and future condition and several more factors that affect the investments overall cost. 

    • It is used by entrepreneurs to recover the expenses from purchasing a commercial income asset and help leverage operating net income. 
    • It assumes loss asset value due to substantial deterioration which creates colossal tax breaks on business owners.
    • There are several items you can depreciate like leasehold, landscaping, or capital improvements. You can also include new HVAC mechanisms, windows, vehicles, equipment or machinery, roof replacements, and more. 
    • Various types of assets come with distinctive depreciation schedules. 
    • Businesses that don’t depreciate assets on their accounts can expect an extensive impact on their profits. 

    How To Calculate Tax Depreciation?

    There are a variety of options a business can take into consideration when it comes to a tax deduction. You can check your options under GAAP (generally accepted accounting principles) for comprehensive calculation methods by: 

    Straight-Line Method

    It is the traditional and widespread process of calculating your tax depreciation. It is done by estimating the asset’s value by cost and what the business expects with salvage value. The total is then divided by the summary of years your company expects to use the property. 

    Double Declining

    The method declares that the property depreciates faster than the declining balance procedure. It’s also considered for any enormous depreciation costs over the first year, and smaller costs are reckoned on the succeeding years.

    Declining Balance

    With regards to this process, more considerable depreciation costs are recorded from the early year when the property’s life. Then small fees are included in the succeeding years.

    Production Units

    Most companies greatly benefit from this procedure. The assets value is calculated by the number of units the property produced rather than measuring the usage lifespan.

    Summary of the Year’s Digit

    With this method, the property’s expected lifespan is included. Every year, it’s divided by the amount starting with a more significant number through its first year.

    • While a straight-line basis is the most commonly used process of calculating your depreciation tax under the GAAP, it’s a pretty straightforward approach in calculating depreciation with fewer errors, consistent methodology, and changes well from the company’s prepared tax return statements. 
    • The process reflects property consumption over time and measuring it by removing its salvage value over the property’s original cost when purchased. The asset’s useful life splits the amount.
    • Salvage value pertains to the cost of a building when it’s not useful anymore. 

    What Assets Are Qualified For A Tax Depreciation? 

    Understanding the rules on tax depreciation and its variations per jurisdiction is essential. The property’s eligibility for every claim may affect certain factors like your location or state rules. However, here are the critical factors for your business property to be eligible for potential depreciation claims. 

    • Asset ownership
    • The useful asset’s life can be determined
    • Property is used for activities to generate income
    • The properties useful life has exceeded over a year


    While authorities treat depreciation cost as a tax-deductible, taxpayers may claim the tax depreciation cost only for eligible physical properties to eliminate taxable income and amount owed taxes. 

    Once you get familiar with how depreciation is processed and calculated, you can fully record your asset expenses and check its eligibility by the state rules your business is covered. That way, you can recover your costs and help your business grow its profit.


    You May Also Like

    How Personal Loans Can Improve Your Credit Score

    There are many ways to improve your credit score, with some being quite interesting. ...

    PR Is the New SEO with Yitzi Weiner

    Rabbi Yitzi Weiner joined the New Theory podcast as he shares why PR is ...

    Top 40 Millennial Influencers to Follow in 2018

    Check out New Theory’s top Millennial influencers for 2018 So why 40? For one, ...