Depreciation rules apply to any asset that loses its value over the time that the particular asset is used. Knowing these rules is essential to businesses when filing tax returns, because the asset is expensed according to the value it currently holds, as opposed to its original value. Many factors determine the depreciation rules for assets, including how long they are expected to last, what type of asset it is, and how the asset is used. Different methods, like the straight-line method or declining balance method, are used to depreciate assets, depending upon which specific rules apply.
Certain assets, like a computer, a business vehicle, or a piece of machinery, lose their value as time passes, a process known as depreciation. This is a crucial concept for accounting purposes, because the value of the asset cannot be expensed as if it is brand new for the entire time that it is used. For that reason, depreciation rules must be understood by businesses so they can follow the relevant tax procedures and be able to write off these assets in the proper manner.
Assets that are used for a period of more than one year, also known as capital assets, must be depreciated for tax purposes. These assets are subject to depreciation rules, and these rules are dependent upon several different factors. Whatever the rules that apply, depreciation is calculated against the actual value of the asset, which is the asset's original cost minus the salvage value the asset holds at the end of its use.
First of all, the type of asset in question determines the depreciation rules that are put in place. For instance, business vehicles are subject to different rules than the ones that apply for a computer or building. How long the asset is expected to last also is a determining factor, as assets that have a shelf-life of five years would depreciate at a slower rate than ones with life expectancies of three years. It's important to note that the extent the asset is used for business purposes will also have ramifications on how depreciation is calculated.
Which depreciation rules apply also will dictate what methods of depreciation are used to determine the amount an asset is depreciated each year. In some cases, business owners may have choice of what method to use, so they should know about the two major methods. Using the straight-line depreciation method, assets are depreciated the same amount each year. Using the declining balance depreciation method, an asset would lose its highest amount in its first year of life and then lose less and less each succeeding year.