Equipment Depreciation

Three Factors in Determining Equipment Depreciation

Equipment depreciation is based on the following information:

• The initial value of the asset
• Its useful life (the number of years it takes to fully depreciate)
• Its salvage value

Basically, an asset keeps depreciating until it reaches its salvage value, at which point you might sell it or scrap it. The useful life of an asset could be based on either manufacturer information, user estimates, or values assigned by the IRS.

How to Calculate Equipment Depreciation

The simplest way to calculate equipment depreciation is with the straight-line method:

(Initial Value - Salvage Value) ÷ Useful Life = Annual Equipment Depreciation

So, if an asset costs $9,000 at the start, has a salvage value of $2,000, and has a useful life of seven years, your depreciation would be:

($9,000 - $2,000) ÷ 7 years = $1,000/year

That means each year, your equipment is worth $1,000 less than the year before.

Know the Worth of Your Equipment

As you plan maintenance tasks on your equipment, it helps to know how much of your time and money you should pour into them. Tracking the depreciation of your assets helps you keep a clear idea of just how much your equipment is worth.

On older pieces of equipment, it may not always be worthwhile to repair it when it fails. If the cost of repairs would be more than its current value, it may be a good idea to replace it instead of fix it.

Taxes

In addition to the raw value of the asset, depreciation is used when calculating taxes. Organizations can write off the depreciation of their equipment as a business expense, so it could help lower their tax exposure.

That fact has implications for maintenance planning as well. If you’re no longer able to claim tax benefits from an asset, it might be less worthwhile to keep maintaining it.

Depreciation in Maintenance Planning

In order to get the most out of depreciation, you’ll need to keep track of it on each asset. Certain types of software systems can help you do that.

Using depreciation as one of your metrics, you’ll be able to determine the most financially efficient course of action regarding older assets.