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Straight-line depreciation is the simplest and most easily managed means of depreciating the value of an asset over a period of time. Essentially, the method involves determining the overall depreciation that is likely to occur during the useful life of the asset, and dividing that amount into equal units. Each calendar year, one of those equal amounts of depreciation is claimed, allowing the owner to receive some type of tax breaks on the cost of the asset. Since the amount of depreciation is the same from one year to the next, there is no need to be concerned with recalculating the rate of depreciation each tax period.
Calculating straight-line depreciation begins by considering the total purchase price of the asset and determining the number of years that the asset will be considered useful. At the same time, it is important to identify how much the asset can be sold for at the end of that useful life, either as a single unit or by disassembling the asset and selling the individual components. The projected salvage value of the asset is deducted from the original purchase price. That figure is then divided by the number of years that the asset is expected to provide useful service. The end result is the amount of depreciation that is claimed for that asset for each of those years.
One of the easiest ways to understand how straight-line depreciation works is to consider the purchase of a new car. The original purchase price is $20,000 US dollars (USD), and the owner anticipates that the vehicle will have a useful life of five years before replacement is required. It is estimated that at the end of that five years the vehicle can be sold as salvage for $500 USD. By deducting this approximate salvage value from the purchase price, this leaves a figure of $19,500 USD that is then divided by five. If the owner chooses to claim straight-line depreciation, he or she will claim depreciation of $3,900 USD for each of the five years of useful life.
Estimations of useful life are usually governed by regulations and standards put in place by national revenue agencies. This means that the process of straight-line depreciation for tax purposes must follow the current standards that apply in a given jurisdiction. The total useful life for a given asset may vary, based on the nature of that asset and what is considered normal and reasonable use of that asset. Tax professionals can aid individuals and companies in understanding the current regulations and making sure that the straight-line depreciation is determined in compliance with tax laws, and allow the taxpayer to receive the greatest degree of benefit from the depreciation.
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