In order to track asset depreciation, you'll use its annual depreciation. The formula is (Initial Cost - Salvage Value) ÷ Useful Life = Annual Depreciation.
What is the useful life?
To know how to track asset depreciation, we need to understand useful life first.
An asset’s useful life is the period of time in which it’s supposed to remain in profitable service, and it’s used to calculate straight-line depreciation. To determine the useful life of the asset, you might:
- Draw on your own experience with that asset
- Use data provided by the manufacturer
- Use the IRS’s property classes in Appendix B of Publication 946
The IRS publication may be a bit difficult to navigate, but it will allow you to factor tax benefits into your maintenance decisions. Basically, if you can no longer claim an asset’s depreciation as a business expense on your taxes, you might find it less worthwhile to perform major repairs on it.
What are the initial and the salvage values?
Along with the asset’s useful life, you’ll need its initial value and final “salvage value,” which is the amount you’d be able to get for it if you sold it.
What is the depreciation?
Taking the initial and salvage values and the amount you initially paid for the asset, you’ll calculate straight-line depreciation with this formula:
(Initial Cost - Salvage Value) ÷ Useful Life = Annual Depreciation
So for an asset that cost you $40,000, has a salvage value of $15,000, and has a useful life of 10 years, you’d plug in the values like so:
($40,000 - $15,000) ÷ 10 years = $2,500/year
That means each year, your asset will depreciate by $2,500. If you’ve had it for four years, multiply $2,500 by 4 to get $10,000. To put this in terms of maintenance planning, your asset is worth $10,000 less than it was when it was new, or $30,000. If you’d spend more than that on repairs, you might be better off replacing it.
How often do I calculate asset depreciation?
Of course, you probably don’t want to calculate depreciation for every asset every time it needs major repairs. For that reason, I’d suggest using one of two tracking methods:
- Calculating the values every time you do taxes and keeping those values readily at hand, or;
- Using asset management software to track it for you.
If you use the second method, you’d just plug the asset’s cost, useful life, and salvage value into the program, and it will automatically calculate it for you. This makes maintenance planning a bit easier since you’ll always have the depreciated value available at your fingertips.