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What are the Best Tips for Figuring Depreciation?

By Ron Davis
Updated Feb 03, 2024
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Different countries have different tax laws. When figuring depreciation, the taxpayer needs to comply with the tax laws of the country to whom taxes may be owed. In the United States, all property purchased for the production of income can either be expensed or depreciated. Consumable goods are treated as current expenses, as are the costs of electricity and telephone. Property considered to have a useful life of three years or longer must be depreciated, and the taxpayer should figure out depreciation values of their personal and businness property using either a general depreciation system (GDS) or alternative depreciation system (ADS) method.

In the US, depreciable property life has been codified, and it is possible to find out what the tax-allowed life of an asset is. Under the general depreciation system (GDS), the default method in figuring depreciation is 200% declining balance, automatically changing to straight line depreciation at the point when the taxpayer receives a greater benefit from this method. A taxpayer may, at the outset, elect either 150% declining balance or straight line depreciation rather than 200% declining balance. The alternative depreciation system (ADS) is straight line only.

When preparing to make a tax election on newly purchased property under US tax law jurisdictions and figuring depreciation, the first step is to check find out the class life for the property. The second step is for the taxpayer to look at his business plan. Any expected changes in cash flow that the taxpayer’s business will generate are the critical issue. If the cash flow will grow sharply over the next five years, straight line depreciation for items recently purchased might make the most sense because increasing taxable income does not want to be paired with decreasing depreciation. If his business growth adds equipment, the taxpayer should take the default option, 200% declining balance, because he will be increasing his depreciation later by adding equipment.

In the US, farmers have a more complex set of calculations than most ordinary office-oriented businesses. When figuring depreciation, the farmer will routinely have property with different depreciation values and timelines. Like office-oriented businesses, most farmers have five-year property including automobiles, computers, and copiers, as well as seven-year property including tractors and combines. Ten-year property includes tress or vines bearing fruits and nuts, fifteen-year property includes fencing and property shrubs, and twenty-year property includes farm buildings. Dairy farmers also have depreciable assets in their cattle.

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