Computers can be depreciated using the straight line method or declining balance method. Straight line method involves subtracting 20% of the original purchase price each year, while declining balance method involves subtracting 40% of the remaining value each year. This is done for tax purposes and requires ownership, use for income-generating business or trade, and a useful life greater than one year.
Basic computer depreciation, or how much monetary value a computer has lost over time, can be calculated in two ways: the straight line method and the declining balance method. The linear method assumes that the computer’s value decreases by the same amount each year, while the declining balance method causes the computer to lose more value when it’s newer and less value as it gets older. Either of these methods can be used to calculate the value of the computer, which is typically done for tax purposes.
In the straight line method of calculating computer depreciation, only two pieces of information are needed: the price of the computer when it was originally purchased and how many years it has been since that time. For the first year, take the original purchase price and multiply it by 20%. Subtract that number from the purchase price, and the resulting number is what the computer is worth after a year of use. For example, if a computer costs $1,000 United States Dollars (USD), multiply that by 20% to get $200. $1,000 – $200 = $800. The value of the computer after one year of use is therefore $800.
For the calculation of the following years it is necessary to use the percentage of the first year. Using the $1,000 example, year two would be calculated by taking the value of the computer after year one, $800, and subtracting another $200, making the computer worth $600 after year two. The third year would result in a value of $400, the fourth year it would be $200, and by the fifth year the computer has fully depreciated, down to a value of zero.
The declining balance method for calculating computer depreciation is a little more complicated. The first step is the same: start with the original computer value, but then multiply it by 40%. For a $1,000 computer, that’s $400. Subtract that amount from the computer’s original price, giving the computer a value of $600 after the first year. For the second year, take the previous year’s value, in this case $600, multiplied by 40%, which is $240. Subtract $240 from the $600, resulting in a value of $360 after the second year.
In the United States, to claim computer tax depreciation, the applicant must own the computer, use it for an income-generating business or trade, and it must have a useful life greater than one year. Form 4562 must be used when reporting depreciated items on a federal income tax return. More information about this procedure can be obtained from the Internal Revenue Service (IRS).
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