A business tracks its assets and investments. These assets depreciate over the course of time while they are in use by the business. That same business relies on the use of a depreciation schedule to report the amount of asset depreciation to the Internal Revenue (IRS) service or governing tax reporting agency. Usually, the business calls on the services of a qualified accountant to handle the creation of a depreciation schedule template for reporting the information to the IRS. The accountant might create a depreciation schedule excel document. There are different types of forms the accountant can use too, including the straight line depreciation template or the accumulation depreciation template.
- 1 Depreciation Schedule Templates
- 2 What is a Depreciation Schedule?
- 3 What You Can List as a Depreciated Asset
- 4 What Are the Categories of Assets
- 5 Depreciation Schedule Excel
- 6 What You Cannot List as a Depreciated Asset
- 7 Depreciation Schedule Examples
- 8 Method of Depreciation
- 9 What Information Appears in a Depreciation Schedule Template
If you operate a business and you plan on deducting the depreciation value of any qualifying assets, you will need to record the information carefully. In the event of an audit, you will have to have proof that you have the assets you are claiming the deduction for during a tax year when you file. The information is reported to the Internal Revenue Service on Form 4562 Depreciation and Amortization. The amount a business can deduct for any given asset is predetermined by the IRS. The IRS decides the amount your assets depreciate based on the assumed usefulness and life of the asset in question.
Depreciation Schedule Templates
What is a Depreciation Schedule?
A depreciation schedule is something where you end up writing off the usage of equipment over the course of time. As the equipment you use wears and tears through use, you can deduct the wear and tear as the loss of asset value. The IRS determines what assets qualify and they estimate how long an asset should last before it is 100% used up. An accountant uses depreciation schedule template that is pre-made or a depreciation schedule excel document they make on their own. They track the amount a business claims for deduction each year. Every asset that qualifies for the depreciation deduction is predetermined and in a set class. They might have a value that ranges in years.
As an example of what the IRS allows for depreciation, some businesses will depreciate the value of computers and others might depreciate the value of business vehicles. On such equipment, the IRS might assign a five-year depreciation. This means you can claim a small percentage of the assets over a five-year period.
What You Can List as a Depreciated Asset
The IRS defines depreciation as the yearly deduction a business can use to recover the costs of an investment one used for business over several years. The time the depreciation of the asset begins is the date of purchase or when it is put into service. Therefore, you will need to have proof of purchase to back your claim during an audit. The proof of purchase must present the same date of purchase as the depreciation schedule does. An asset will stop depreciation once you stop using it for your business. If you stop using the asset, this is also noted on the depreciation schedule template or depreciation schedule excel document. It also ends in depreciation when you have used 100% of the allowable depreciable value indicated by the IRS. When you stop using the asset for generating income, that’s when the product’s depreciation value concludes as well.
If you plan on depreciating the value of any equipment or investment, the items must adhere to the guidelines established by the Internal Revenue Service. Such requirements include that you must be the owner of the property in question. You must be using the equipment to produce income to depreciate the value of the asset. The asset must have a useful life value that is determinable. The asset must have an expected useful life of one year or more.
The IRS defines the allowable investments you can list for depreciation on a depreciation schedule. Such items include:
- Cars and trucks
- Office equipment
- Copy machines
What Are the Categories of Assets
There are six different categories of depreciable assets you can track on a depreciation schedule. With each category, there is a set number of years in which you can depreciate the value of the item. Tangible items and equipment are depreciable. The categories include:
- Three Year Usable Life Depreciable Items: certain livestock, certain manufacturing tools, and tractors.
- Five Year Usable Life Depreciable Items: cars, computers, construction assets, light trucks, and office equipment.
- Seven Year Usable Life Depreciable Items: appliances, office furniture, and other IRS approvable items not suited to alternative categories but that qualify for depreciation.
- Real Estate (Not Land) over a 27.5 Year Period: rental and residential properties.
- Real Estate (Not Land) over a 39 Year Period: commercial properties.
Any of the above depreciable assets begin depreciation on the date you start using it for generating an income. When you “place the item in service,” it means the business can use the asset for making money. The asset is not for personal use during the time it is in service. You must remove the item from service if you plan to use it for personal use. As an example, you cannot invest in a vehicle and park it for two years, all the while depreciating it. You must be using the vehicle actively for business in order the allowable depreciation to apply.
Depreciation Schedule Excel
What You Cannot List as a Depreciated Asset
The item cannot be depreciated when you stop using it for the business. If you sell the asset, you can no longer depreciate the value on a depreciation schedule. If the item finally reaches its useful life, it can no longer be depreciated by the business. There are other items that cannot be depreciated on a depreciation schedule template. These non-allowable items include:
Cash: Any income the business has in its accounts is not depreciable. The cash is not something that has a usable life limit and it is not a long-term business asset. Thus, there’s no need to list it on a depreciation schedule template.
Immediate Assets: Immediate assets are those that are used within the same year and are then disposable. Any asset that has a usable limit of less than a year is not depreciable and would not be entered a depreciation schedule excel document. As such, accounts receivable, which is monies others owe the business, pre-paid accounts, prepaid insurance, and supplies are non-depreciable items.
Supplies: references the items you use this current year for the business. These items cannot be depreciated.
Land: Since land increases in value it is not depreciable. However, the buildings and structures are depreciable if you use them for business operations.
First Year Expense Regulations
There are set rules that apply to the first year of depreciation. The IRS establishes these rules and an accountant will be familiar with them. If you need to learn the rules because you are filling out a depreciation schedule excel document yourself, the IRS lists many publications for your review. One such rule you will need to familiarize yourself with is the First Year Rule or Regulation for Depreciation which is sometimes called the Section 179 deduction. This rule lets a business depreciate an asset the first year you put the asset into service and up to a specified limit. For instance, in 2015, this upper limit was up to $500,000 for the first year as a depreciable deduction.
There is also a First Year Expensing Phaseout regulation that applies to depreciation rules. If the item you put into service has a value that is greater than two million dollars, the initial year dollar limit is reduced by the amount it exceeds two million dollars, dollar for dollar. Let’s look at an example to understand better.
In this scenario, you invest in depreciable equipment for generating an income. The equipment costs $2.4 million. A deduction limit is placed on this equipment of $500K. Now, you have a $400K overage on the allowable $2 million for the first year phaseout. Thus, 500K less 400K equals $100,000 which is the allowable depreciable value for first year phase out.
Bonus Depreciation Regulations
Along with first year expensing, you get the benefit of what is called bonus depreciation. It lets you deduct more value in the first year that you put any asset into use to generate a profit or when you put the item in service. There are special rules that apply for the asset to qualify under bonus depreciation options. A depreciation schedule will help you track an asset and any first year and bonus depreciation you might be eligible for: This ensures you get the most from your deductions. The rules are as follows:
The items you place in service and claim the bonus depreciation for must be brand new and never used elsewhere. This is beneficial because it helps you absorb some of the costs for newer equipment.
- The first-year expensing option must be figured out first before you can calculate the bonus depreciation. The first-year expensing is deducted from the total cost of the equipment you buy.
- Once you figure out the cost of the equipment less the first-year expensing, you take the total and divide it by 50 percent.
- Next, the balancing remaining gets multiplied by 50 percent to determine the bonus depreciation value.
- Whatever remains once you deduct the first-year expensing and the bonus depreciation you can still depreciate under the Modified Accelerated Cost Recovery System (MACRS) established by the IRS.
Depreciation Schedule Examples
Method of Depreciation
There are several methods of depreciation. Such methods include straight line depreciation and accumulation depreciation. Straight line depreciation is a slow type of depreciation that is easy to track and implement. Let’s consider the following example to see how the straight line depreciation method works.
Straight Line Depreciation
Imagine you buy a computer system and printer for $1800.00. Now you subtract the salvage value of the computer and printer because it cannot be counted into the depreciation value. So, imagine the salvage value is $500. Now you have $1300 of an investment we are looking at to depreciate over a five-year period. Why five years? Because that’s what the IRS deems appropriate for computer equipment. Based on the straight line depreciation rules, there is a set amount you can take off the item for the first three years of ownership. The following are the allowable depreciation values on the computer and printer. In this scenario, using the item for half the year in the first year you place it into service.
Because you are placing this item into service in the middle of the year, you must rely on the half year convention. You can take a specific percentage based on the month you put the asset into use for generating an income. In this scenario, you will integrate the use of the computer and printer in the third month of the year. Since only 75% of the year remains, you can only depreciate the item by 75% for the first year it is in use. Thus, straight line depreciation method breaks down the depreciable value as follows:
Year One: $1300.00/5 years = $260.00. You can depreciate 75% of $260.00. Thus, the depreciable value of your equipment in the first year is $195.00.
Year Two: The computer and printer system depreciate another 50 percent of the total cost in value. Thus, $1300.00/5 years = $260.00.
Year Three: The computer and printer system depreciate another 50 percent of the total cost in value. $1300.00/5 years = $260.00.
Year Four and Five: The computer and printer system depreciate another 40 percent of the total cost in value. Thus, you can depreciate $780.00 of the item the current year which is divided by the five-year allowance. $780.00/5 = $156.00 depreciable value. On the fifth year, the remaining $780.00 is reduced by another 30 percent which equals $546.00. The latter amount is further divided by 5 giving you a final year straight line depreciable value of $109.20.
An accumulated depreciation is another option you can use to depreciate your assets when you file taxes. The depreciation schedule will help you track how much you can depreciate and when. A contra account is another term for accumulated depreciation. Essentially, a contra account’s balance is subtracted as an offset from the value of related asset accounts. The accumulated depreciation or contra account appears on the balance sheet of an accounting ledger. It is listed as and includes Property, Plant, and Equipment portion of the sheet. This section is found listed under current assets of a business. Other assets listed include inventory, accounts receivable, and cash, all of which have no depreciation value.
Let’s use the following scenario to understand how accumulated depreciation works:
Imagine you buy a $5,000.00 machine and you make a $2,000.00 investment in office furnishings in 2015. Two years prior to the current tax year, you started the business. That year you used section 179 to claim the first-year expensing when you bought the equipment the same year. Since that time, you have not made any new investments in furnishings or machines. The Non-Current Assets (Property, Plant, and Equipment) section of your business’s balance sheet must have specific information in it. The balance sheet itself will show a listing of the machinery for $5,000.00. The Office furnishings has a separate listing in the same area for $2,000.00. The accumulated depreciation is subtracted from the total (less $7,000.00). This leaves a Property, Plant, and Equipment balance of $0.00. Tracking accumulated depreciation value is important because it helps you get back some of the money you must invest in equipment and property. Since it lowers your income you pay fewer taxes. When you are paying self-employment tax, it reduces taxes as well.
What Information Appears in a Depreciation Schedule Template
There is specific information that shows up on a depreciation schedule. If you are using a pre-made depreciation schedule template or you are using a depreciation schedule excel document you create on your own, you’ll need to make sure the following information is included. It will ensure excellent record keeping.
- Asset Title and Description: The item should be clear about what equipment one is using. For example, if you are depreciating the value of a new Dell® computer, then the item should list the model and a serial number of the equipment as well as what parts and peripherals are included with the device. If depreciating a vehicle, the year, make, and model number, as well as a Vehicle Identification Number, should be listed.
- Initial Cost: What you paid for the equipment and if it was bought new or used.
- Useful Life Estimate: This is what the IRS assigns as how long the equipment can be deducted. It should be something from three to 39 years depending on the asset.
- Depreciation Method: This should list if you are using the straight line or accumulated depreciation method to depreciate the item on your taxes.
- Value of the Item if Salvaged: If you can get money for the item once it is no longer in use and sell it off as salvage, this needs to appear on the depreciation schedule. It reduces the amount you can claim for depreciation because the salvage value is income.
- Purchase Date of the Asset: The exact date of purchase of the asset. It should match the day you put the item into service for ease of record keeping.
- Current Period Depreciation: You should have the current amount of depreciation up to date and any past depreciation values listed.
- Accumulated Depreciation: The depreciation expense in total from the date the item was put in service to the date of the current report.
- Net Book Value: The fixed asset cost less the accumulated depreciation of the asset.
- Additional Necessary Information: The location of the depreciable asset, any identification numbers like serial numbers and VIN numbers, and anything that makes it easy to locate the asset and identify it. This will asset if it ever becomes necessary to do an audit and to do a physical count of the assets in question. In this case, you can assign the asset a special number for record keeping purposes.
Businesses benefit greatly from using an accurate depreciation schedule template. Whether using a predesigned depreciation schedule template or creating a depreciation schedule excel file, the final recordkeeping account must have all the vital information a business needs to prove in an audit the correct deductions were made during tax filing. The depreciation schedule helps a business track the assets that depreciate over the set course of time as assigned by the Internal Revenue Service. It ensures the business can take full advantage of every deduction possible.