Basic computer depreciation, which is 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 straight line method assumes that the value of the computer decreases by the same amount every year, while the declining balance method causes the computer to lose more value when it is younger and less value as it ages. Any of these methods can be used to calculate the value of the computer, which is typically done for tax purposes.
The straight-line method of calculating computer depreciation assumes that the value decreases by the same amount each year.
In the straight-line method of computing computer depreciation, only two pieces of information are needed: the price of the computer when it was originally purchased and how many years have passed since that time. For the first year, take the original purchase price and multiply it by 20%. Subtract this number from the purchase price and the resulting number is what the computer is worth after one year of use. For example, if a computer costs $1,000 US dollars (USD), multiplying by 20% is $200. $1,000 – $200 = $800. The value of the computer after one year of use is $800.
To claim depreciation on tax returns, the computer equipment must be owned by the company and used for revenue-generating business activity.
To calculate subsequent years, the percentage of the first year must be used. Using the $1,000 example, year two would be calculated by taking the computer’s value after the first year, $800, and subtracting another $200, making the computer worth $600 after the second year. The third year would have a value of $400, the fourth year would be $200, and by the fifth year the computer would have fully depreciated to a value of zero.
The declining balance method of calculating computer depreciation is a little more complicated. The first step is the same: start with the original computer value, but then multiply by 40%. For a $1,000 computer, this is $400. Subtract the 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 times 40%, which is $240. Subtract $240 from $600, giving a value of $360 after the second year.
In the United States, to claim computer depreciation on taxes, the claimant must own the computer, use it for an income-generating business venture or activity, and it must have a useful life of more 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).