Every piece of equipment you own loses value over time, but do you know how to use that depreciation to benefit your business?

With the right tools, you can better understand how your equipment depreciates and how you can use that to optimize and streamline your maintenance operations.

What is equipment depreciation?

Equipment depreciation is the amount of value your equipment loses each year. Calculating and understanding your equipment depreciation helps you make better business decisions about your assets such as whether it’s more cost-effective to replace an asset or continue repairing it.

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What types of equipment depreciate?

The better question might be what types of equipment don’t appreciate, and the answer to that is, nothing really. Essentially any type of equipment that you could conceivably use at your organization depreciates. Everything from computers to machine presses to the building you work in depreciates over time. Even if you were to buy it and leave it unopened and unused, sitting in your warehouse for years, it would depreciate.

In truth, the only things that don’t depreciate are specialty items or very unique items that either retain or appreciate in value, typically for sentimental reasons. The best example is classic cars. Although they did depreciate just like everything else, at a certain point long after they had lost their value as a useful piece of equipment, they began to regain value mostly for sentimental reasons.

There is a difference when it comes to deprecation for tax purposes, however. In the U.S., the Internal Revenue Service (IRS) doesn’t count depreciation costs until the equipment is actually placed into service at your organization. So, if you purchase a piece of equipment, but don’t actually install it and begin using it until the next calendar year, you are not required to count the previous year of depreciation.

While that is the case for tax purposes, even if the equipment was never used, the resale value of that equipment has still depreciated by one year. This is very common with cars. The deprecation value for vehicles is usually determined by both time and usage (miles driven) but the vehicle does significantly depreciation the moment your drive it off the dealership lot. Even if you drive it down the street and park it for a year, it still has lost quite a bit of value for simply being an older model.

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Why is equipment deprecation a good thing?

For business, equipment deprecation is helpful because it allows you to claim that deprecation on your taxes every year. You can write off your equipment deprecation as a business expense on your taxes which can lower the amount of taxes your company is required to pay for the year.

Knowing your equipment depreciation rate is also useful for planning maintenance activities for that asset as well. When you know the deprecation rate, you can determine if it’s worth continuing to repair the asset beyond a certain point or invest in purchasing a replacement.

Many organizations plan their maintenance operations around the time when they will be unable to continue claiming tax deductions on an asset. They know that when the asset reaches that point, they will replace it and save additional maintenance costs.

What is the depreciation rate for equipment?

There is really no standard timetable for equipment depreciation as it all depends on the industry you’re in and the service your equipment provides to your business. For heavy use industries, some equipment can depreciate in as quickly as three years while other equipment such as storage tanks may have a depreciation of 50 years.

For example, light work trucks with an actual weight of fewer than 13,000 lbs have a recommended depreciation period of four years while equipment used in the manufacturing of vegetable oil has an 18-year depreciation time.

The depreciation rate applied to your assets is determined by your accounting department based on your country’s tax laws. In the U.S., the IRS has provided some guidelines on how to properly apply depreciation rates to your equipment based on your industry.

How do you calculate equipment depreciation?

There are actually a few different ways to calculate equipment depreciation but the most commonly used one is straight-line depreciation. The formula for calculating equipment deprecation is centered around three things:

  • Initial value (purchase price)
  • Useful life
  • Salvage value

The initial value is the price you paid for the equipment, not necessarily its market value. For example, if the piece of equipment you purchased is typically worth $20,000 but you were able to purchase it at a discount for $18,000, the initial value to you is $18,000.

An asset’s useful life can be determined in a few different ways. For tax purposes, the best method is to consult the governing tax authorities. However, you may choose to use a different method to determine your equipment’s useful life for calculating things like total cost of ownership (TCO) or when to repair or replace an asset.

For the purposes of calculating depreciation, it’s best are going to use the useful life recommended by the tax law.

The salvage value is what you could reasonably sell the piece of equipment for at the end of its useful life.

The formula for deprecation is: 

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Let’s use the asset mentioned above that you purchase for $18,000. If that asset has a useful life of 5 years and a salvage value of $3,000, then the annual depreciation rate would be $3,000.

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Keep track of equipment depreciation with EAM software

Equipment depreciation is a useful metric to keep track of for your organization and manually trying to calculate it every year is inefficient and introduces the potential for human error. The best way to keep track of it is to use enterprise asset management (EAM) software.

EAM software helps you track every step of your asset’s journey through your organization from the time you purchase it until you salvage or dispose of it. With it, you can keep track of the TCO as well by tracking maintenance costs, parts used, amount of downtime, and more. You can also generate detailed reports on the metrics you and your accounting department need to keep track of for your tax purposes at the end of the year.

Next steps

Getting started with EAM software at your organization is easy and the best way to do it is to reach out to one of our experts. If you still have questions about EAM software or equipment deprecation, you can schedule a live, personalized demo with our team to ask questions and see the software in action for yourself.Blog_CTA_MP_2

Executive summary

Equipment depreciation is the amount of value your equipment loses every year until the point where it no longer holds any residual value. Every type of equipment depreciates, and, in most countries, you can claim that deprecation value as a business expense on your taxes. Understanding depreciation can also help you determine the total cost of ownership for your assets and decide when it’s time to replace your equipment. The best way to keep track of depreciation and use it to make smart investment decisions is with EAM software.

About the author

Jason Cockerham

Jason is a storyteller at heart with a career spanning everything from film and TV to iPhones. Just don't expect much before his first cup of coffee.
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