What Does Depreciation Mean in Business and How Does It Work?
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What Is Depreciation?
How Depreciation Works
A description of the asset Date of purchase The total price you paid for the asset Expected useful life Depreciation method used Salvage value (how much you can sell it for once it’s past its useful life)
Depreciating Rental Assets
The property is used in your business as an income-producing asset. You’re the owner of the property. The rental property has a calculable useful life. The property is expected to last and produce income for more than one year.
What Can and Can’t Be Depreciated?
It must have a lifespan of one year or more. You must be the actual owner of the asset. The asset must be used by your business.
How to Calculate Depreciation
Section 179 Deduction
Determine the initial cost of the asset (example, $50,000). Calculate its useful life period (example, 10 years). Calculate the annual depreciation rate (example, if it’s useful life equals 10 years, then each year the asset will depreciate by 10% each year). Multiply the initial cost by twice the annual depreciation rate to get the depreciation amount for the first year (example, $50,000 x 20% = $10,000; you can deduct $10,000 this year). Next, subtract the depreciation amount from the initial value to get the new book value of the asset ($50,000 - $10,000= $40,000). The next year, multiply the new book value by the double annual depreciation rate tto find out how much to deduct this year ($40,000 x 20% = $8,000; you can deduct 8,000 this year). Continue doing this until you’ve the book value has reached 0.
Units of Production
Comparing Types of Depreciation
Pros and Cons of Depreciating Assets
Depreciation Expense vs. Accumulated Depreciation
Depreciation vs. Amortization
Depreciation vs. Capitalized Costs
3 Small Business Loan Tips
If you need to borrow money to cover seasonal cash flow fluctuations, a business line of credit, rather than a term loan, provides the flexibility you likely need. SBA loans are guaranteed by the U.S. Small Business Administration and typically offer favorable terms. They can also have more complicated applications and requirements than non-SBA business loans. Traditionally, lenders like to see a business that’s at least two years old when considering a small business loan.
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