A business that owns capital assets such as real estate, vehicles, equipment and furniture must calculate depreciation expense on those assets in order to deduct the cost of the assets. According to the IRS tax code, capital assets like equipment and furniture should be initially shown in the balance sheet of the financial statements and they would appear as equipment and furniture at their original cost. The deduction for depreciation expense is then taken over some specified period of time. There are several depreciation methods that can be used for this calculation. All depreciation is shown on Form 4562, and this attaches to the individual federal tax return.
Select straight-line depreciation if you want your business to have an even deduction for your capital costs over a longer period of time. For example, a piece of machinery that cost $70,000 is considered an asset with a seven-year life, and if the straight-line method of depreciation is taken, a deduction of $10,000 will be taken each year for seven years.
Select accelerated depreciation such as the 200-percent declining balance method if you’d like to take a larger deduction the first few years. This method is determined by taking the straight-line figure and doubling it. For example, if the straight-line method showed a depreciation deduction of $20,000, the double-declining balance method would allow $40,000 ($20,000 times 200 percent).