Every year, businesses have to take over the challenging task of tracking their assets and calculating their depreciation in preparation for their tax returns. For many businesses, taking care of this complex process can be extremely difficult, especially when other aspects of their business require particular attention. The importance of taking your business equipment depreciation into account cannot be stressed enough. However, there may be situations where business owners don’t understand how to calculate depreciation and formally file their reports to the IRS (Internal Revenue Service). Our Roseville and Sacramento tax accountants from the Cook CPA Group invite you to keep reading as we discuss how you can calculate depreciation of business equipment in California.
What is Depreciation on a Business?
Depreciation refers to the process of deducting the costs of an acquired expensive piece of equipment for your business or corporation. The acquisition of new business equipment can be deducted from your taxes. However, many companies deduct depreciation spread over multiple years instead of deducting any projected depreciation in only one tax year. This can help reduce your tax burden and increase deductions.
How does a business determine depreciation on a piece of equipment? Typically, depreciation is determined by calculating the asset’s useful life. Suppose you are acquiring a high-end computer worth thousands of dollars to use as a workstation. These pieces of equipment can have a useful life of five to six years, depending on your configuration. This means you can depreciate your equipment over your computer’s useful life of five or six years.
This is a simplified example to illustrate how depreciation can be calculated, depending on your business equipment. Typically, the process can be more complicated as every asset in your business is classified separately into different categories, each with its own useful life. You can depreciate your equipment in a shorter time than its expected total useful life. For instance, following the last example, your computer may have a useful life of five years, but if it depreciates faster, you could establish a shorter depreciation rate.
What Are the Different Types of Depreciation on Business Equipment?
There are different types of business equipment depreciation methods available to business owners. However, the IRS will allow only one depreciation method on your business tax returns. Some of the methods you can utilize for your business’ taxes and financial statements include the following:
Double-Declining Balance Depreciation
This depreciation method can be used by businesses that want to recover more of their asset’s value up front rather than over an extended time. During your first depreciation year, you would take two times the amount of your asset’s value. After this, you would use a depreciation rate using the asset’s original cost and subtracting the value taken during its first year of use.
The straight-line depreciation method is the easiest way to calculate depreciation on business equipment. With this method, you can split your asset’s value evenly across its useful life. Typically, the formula used on this approach considers the asset’s cost minus its salvage value over its useful life. This would give you the depreciation value to consider during your tax year. This type of method is preferred by small businesses that don’t have an in-house tax advisor or complex tax systems. However, it is always recommended to hire the services of an Elk Grove, CA small business tax return accountant who can help you solve your asset depreciation every year.
Sum-of-the-year’s-digit depreciation (SYD) is a method that allows you to depreciate your business’ equipment higher on its first useful life years and lower on its last useful life years. Like a double-declining depreciation, this method allows you to recover more of your asset up front, but the depreciation over your asset’s life cycle is slightly more streamlined. The formula for this type of depreciation method can be complicated, especially if you own multiple pieces of equipment with different life cycles. Our Roseville small business accountants can help you with this matter.
Why Is Depreciating Your Business Equipment Important?
As a business entity, you need to depreciate your business equipment for two main reasons. First, it can help you control your business’s finances, and second, you can have control over your business tax returns and deductions. In addition to these, there are other benefits you can get from depreciation.
Depreciation can help your business accurately present the IRS with your incurred expenses on your tax year. The IRS will look at your financial information very closely, following your reports and considering all of your assets. Depreciation can help you file complete, accurate statements that lack any ambiguity or misleading information that can get you into trouble with the IRS.
In addition to helping you with the IRS tax return information, depreciation can help you keep your books in check. As we mentioned, all assets depreciate over time, and depreciation can help you have a clear idea of your equipment’s value on its current life cycle. Additionally, you can recover the cost of your asset when you originally purchased it. Finally, it is essential to understand that depreciation can be tax-deductible. This fact can help businesses like yours to save money on your yearly taxes. It is always recommended to hire experienced tax preparation and planning accountants to make sure you meet all depreciation requirements for your tax return.
Contact Our Experienced California Tax Accountants for Assistance with Your Business Equipment Depreciation
If you require assistance with your business equipment depreciation and your yearly tax returns in California, we can help. Our Roseville and Sacramento, CA accounting firm Cook CPA Group, have years of experience helping thousands of businesses with their tax returns and other needs such as business equipment depreciation reports. Thanks to our many years of experience, we can guide you and help you file accurate and complete IRS forms so you can focus on growing your business. To learn more about all of our services, call our offices today at (916) 269-9281.