Depreciation

Depreciation is the process of deducting the total cost of something expensive you bought for your business. But instead of doing it all in one tax year, you write off parts of it over time. When you depreciate assets, you can plan how much money is written off each year, giving you more control over your finances.

The number of years over which you depreciate something is determined by its useful life (e.g., a laptop is useful for about five years). For tax depreciation, different assets are sorted into different classes, and each class has its own useful life. If your business uses a different method of depreciation for your financial statements, you can decide on the asset’s useful life based on how long you expect to use the asset in your business.

Example:

Sticking with the bouncy castle example, it costs $10,000, has a salvage value of $500, and will depreciate over a 10-year useful life. For the castle’s 10-year useful life, adding up the digits would look like this: 1+2+3+4+5+6+7+8+9+10 = 55

The first year you depreciate using the SYD method, your equation will look like this:

Formula: (remaining lifespan / SYD) x (asset cost – salvage value)

(10 / 55) x (10,000 – 500) = $1,727

So, for your first year, you’ll write off $1,727.

Keep in mind, each year, the bouncy castle’s remaining lifespan is reduced by one, So, in your second year of depreciation, your equation will look like this:

(9/55) x (10,000 – 500) = $1,555