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How to make up for depreciation


Introduction

Depreciation is the reduction in value of any of your company's fixed assets.For example, the vehicles that you own or even the buildings may depreciate from year to year.In business, there is really no such thing as making up for depreciation.You can't make up for the fact that your work truck gets older every year.What you can do to try to make up for that loss is to use the loss as a tax write off.

Instructions

Difficulty:medium easy

Steps:


Step 1:Know what you own.The first step to making up for depreciation is to know the value of your assets.This is a starting point from which you can calculate depreciation.In order to prove this starting point to agencies such as the IRS (and really, who else would you need to prove such a thing to) you should be careful about keeping receipts for all the payments that you make.

Step 2:Reduce depreciation.Some items like cars, depreciate linearly and the depreciation can be calculated fairly easily. Other items, like computer software or communication equipment depreciates not by loss of service but by being outdated.You can reduce non-linear depreciation costs by purchasing programs with automatic updates.For example, if you need a specific kind of software for your business and it is updated once a year, you will do better to purchase automatic updates rather than to have to buy the new program every couple of years.Make electronic and communication purchases carefully, remembering that depreciation of these items is not accounted for by a simple program that you can hand to the IRS.

Another option for reducing depreciation is to make sure your goods get proper care.On paper, you work vehicles might only have worth for 10 years.However, if you take great care of the vehicles you might end up getting another 5 years of service out of them and that service would be `free".

Step 4:Estimate the depreciation.The second step to recouping your loses based on depreciation is to estimate the depreciating value of your property.As far as the IRS is concerned, there is really only one way to estimate your loss; this is called the modified accelerated cost recovery system or MACRS.This system uses a linear equation to estimate the value of your property.The way it works is to draw a line from two points on a graph with the amount the item is worth on one axis and years of service on the other.One end point is the price that you paid for the item when it was new-this sits at 0 years of service.The other endpoint of the line is at 0 dollars of value and the number of years that the item is expected to be valuable.From the line between the two points, the estimated value of the item can be predicted for each year of service.

Unless you really like statistics and handling lots of numbers, you might try out a computer program to track the depreciation of your assets.A computer program can save you time and fixed asset programs also proved guidelines for tax rules.These programs calculate depreciation for "alternative minimum tax". This will help you make up for depreciation by minimizing the assets that you have to report to the IRS.

Step 4:Finally, have fixed assets that appreciate to make up for the fixed assets that depreciate.As you probably know, real estate tends to appreciate or increase in value as time goes on.If you balance your spending by purchasing some items that appreciate and some items that depreciate, you will eventually end up ahead of the count.

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