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Construction Accounting: How to Depreciate Tools and Vehicles

Posted on May 2nd, 2017

Buying the assets you need to get your business started and keep it going can be costly. While there are many easy write-offs to save money, such as certain travel expenses conferences, home office deductions, and office supplies, the bigger the asset the more complicated the write-off.

Depreciation is a smart way to get money back on a big purchase, including large hardware, furniture, property, and cars. But there are plenty of things to keep in mind for proper depreciation:

  • Follow GAAP – Generally Accepted Accounting Principles are standard methods of operation that dictate how bookkeeping processes are handled. This allows governing organizations to ensure streamlined reporting.
  • Spread out cost – While you can write off the full amount of the asset in the first year, up to a certain dollar limit, dispersing the cost of the asset across several years allows you to reap the long term benefits from your investment.
  • Calculate cost – It’s more than what you simply paid for it. The cost of an item includes the taxes you paid on it and what it costs to operate. If the asset is a car, upkeep and maintenance can be factored into cost as well. After the asset is outside of the window of use, it’s helpful to know its worth after-the-fact, called salvage.

Is it a Fixed Asset? If the item is designed to be used over the long-term it’s considered a fixed asset. Cars, furniture, and property are considered fixed. If something can be used and depleted during the course of standard business operations, such as office supplies, it is not a fixed asset.

How Long is the Equipment Useful? – At some point, your fixed asset may no longer prove useful for your business. Tools can break or become damaged and cars can cease to function dependably. The IRS provides a timetable of usage periods for items like vehicles to incorporate into your depreciable asset calculations.

When to Record Assets – How long do you expect to use it? If you plan to use the asset for 5 years or 10 years, or however long the item will prove useful, spread the cost out on financial statements over that time period.

Determine Method of Depreciation

There are formulas involved in each method of depreciation — and even the more straightforward method can prove to be a significant amount of number crunching and figure-finding. If you need help depreciating the cost of fixed assets over their useful life or using accelerated depreciation formulas, please contact Davis and Associates today. We specialize in accounting for specific verticals, including construction, and are adept at depreciation accounting to provide the most tax benefits.


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