http://toms-shoes23.webs.comDepreciation 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,alviero martini, quarter,ray ban wayfarer, six months or one year,toms womens shoes. Lets 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,spaccio occhiali, or $142,alviero martini outlet.86,occhiali oakley.
Most non-accountants roll their eyes and shudder when the topic of depreciation comes up,borsa longchamp. 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,Amount Of Depreciation -it May Be Simpler Than You Think . But is it really,occhiali oakley? 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),oakley outlet.
-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,louis vuitton outlet. 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,ray ban wayfarer, 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,occhiali ray ban. 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,cheap toms. So, most small businesses that arent 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,toms for sale. Most often it will be one of two methods: the straight-line method or an accelerated method called the double-declining balance method,occhiali oakley. Lets briefly discuss these two methods:
This is the simple method mentioned in the definition above. Just take the cost of the item,louis vuitton borse,Amount Of Depreciation -it May Be Simpler Than You Think , divide it by the useful life and youve 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,oakley italia. 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,longchamp borse.50).
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,borse alviero martini. With this method, simply divide the cost of the item by the useful life years as in the straight-line method,alviero martini outlet. 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,occhiali ray ban. Next, divide that result by the useful life and multiply that result by 2, and so on for each remaining year.
But, wait! You dont 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,alviero martini prima classe. So,occhiali oakley, to make it easy to figure out,cheap toms, they assume the higher and lower depreciation amounts will all average out.
Actually, the IRS doesnt even call it depreciation anymore. They call it cost recovery. Lets face it,longchamp outlet. This is a political tool. Congress giveth and taketh away. They have been playing with this system for years,Amount Of Depreciation -it May Be Simpler Than You Think ,louis vuitton borse. 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,Amount Of Depreciation -it May Be Simpler Than You Think . Now congress is working on a bill to drop that down to 15 years for leasehold improvements.
Before December 31,oakley frogskins ebay, 1986 we had ACRS or Accelerated Cost Recovery System,longchamp borse. 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,borse alviero martini, then,longchamp italia, 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,longchamp outlet. 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,louis vuitton outlet.