In equipment depreciation, the asset value of a piece of equipment decreases each year from the lump-sum value that it originally had. This is because any equipment put into long-term use would need maintenance work now and then, and there's always the possibility that it could break down and need replacement parts, the cost of which can be cut from the interest you receive and can be counted as a loss to your business. The value of a year's equipment depreciation can therefore be considered as an expense for that year, which means you can use it as a deduction from your business taxes. There's no easy formula for everything, but if you're interested in using equipment depreciation as a tax deduction, these are the methods you can follow to help you:
- Keep a record about each piece of equipment for which you'll make use of equipment depreciation as a tax deduction. In this record, write down the date of purchase, the price at which you got it, the date when the equipment was put into use, plus any maintenance work that has been done. You can also keep a separate accounting record with revenues, amortization rates, the cash flow of your business, and anything else that might help you keep track of what's happening to your business and make it easier for when you do compute your taxes.
- To make sure everything is in order, you should keep a master copy of your depreciation table containing all the necessary information that appears in your equipment records. You can use this table later as a simple aid when you have to file your tax return. Don't forget to take note of your tax filings and any instructions you might receive from the IRS when you put in a schedule of the amounts charged to annual depreciation. It's also a good idea to read the instructions for IRS Form 4562 to know exactly what part equipment depreciation plays in your taxes, and what the IRS wants to see in the record-keeping forms of businesses that make use of equipment depreciation as a tax deduction.
- Find out the legal depreciation schedule and the annual depreciation allowance allowed for each of your pieces of equipment in use. You can do this by either consulting with a professional tax service or your accountant or, if you have it, by using commercial tax software.
- Put this information in your records, your master depreciation table, and in your Form 4562, along with bonus information and any other schedules that you might be required to file as well.
- Write the required information from your Form 4562 into your Business Schedule C, and file the two filled-in forms with your annual tax return.
It is also a good idea to keep copies of your Form 4562 according to the year they were filed for easy reference, and to avoid making an erroneous statement when you're asked for the depreciation account balances and schedules of your business for the previous year.