3 Things to Know about Heavy Equipment Depreciation
You utilize heavy machinery for tackling the toughest jobs, from digging and dozing to lifting and hauling. However, you might not be thinking about how use and time can decrease the value of your equipment. This is called depreciation and it occurs every year, from the moment you first fire up your machine to the day you sell your equipment or scrap it. While you may not be concerned about depreciation right now, it is important to remember if you plan on selling your lifting, construction, or farming equipment. To help you out, Equipment Trader is sharing three things to know about heavy equipment depreciation.
1. Factors that Contribute to Heavy Equipment Depreciation
While time is the biggest factor that affects depreciation, physical and functional condition also contribute to how quickly your heavy equipment depreciates.
Physical condition refers to the wear and tear on your machinery, including dents, rust, and other physical damage. Functional condition is concerned with how the equipment operates. A heavy machine in good working order will depreciate less over time than one with inoperable or inadequate functions.
2. How to Calculate Depreciation
Calculating depreciation can help you determine the optimal time to sell your equipment. If you’re trying to calculate the depreciation of your heavy machinery, you have to consider three values: cost value, useful life, and salvage value.
Cost Value
Cost value is the initial amount you paid for the equipment, including taxes, transportation, and other fees.
Useful Life
Useful life is an estimate of the average number of years your heavy equipment will be operable before its value is fully depreciated. The longer the useful life, the slower your machinery will depreciate. This will vary depending on the type of equipment you have.
Salvage Value
Over time, your equipment will continue to depreciate until it reaches its salvage value. This means it has reached the end of its useful life and its only value comes from the spare parts that you may be able to sell or reuse on other machines.
With these three values, you can calculate your machine’s depreciation using the straight-line method. This makes the assumption that your heavy equipment will depreciate at the same rate every year of its useful life until it reaches its salvage value. To calculate depreciation using the straight-line method, follow this formula:
(Cost Value – Salvage Value) ÷ Useful Life = Annual Depreciation
3. You Can Claim Depreciation on Your Taxes
Depreciation isn’t always a bad thing. The Internal Revenue Service (IRS) allows business owners to claim the depreciation on the heavy equipment you actively use. If your machinery is a business asset, you can write off this depreciation as an expense and lower the amount of taxes your business is required to pay for the year.
Section 179 of the IRS Tax Code, along with Section 168(k) known as “bonus depreciation,” also helps business owners to pay less money in taxes. Section 179 allows business owners to deduct the full purchase price of eligible equipment when you put it in service. Then, bonus depreciation lets you expense 100% of equipment purchases after Section 179.
These deductions apply to both new and used heavy equipment and machinery and allows you to receive these tax benefits more quickly compared to across several years like the standard depreciation option.
Understanding how depreciation works and being able to calculate your equipment’s value loss can be very beneficial when it’s time to sell your heavy machinery. These three things are important to keep in mind as you utilize your equipment and start thinking toward the future. When it’s time to sell your heavy machinery, list your unit on the nationwide online marketplace at EquipmentTrader.com/Sell. If you don’t know where to start, check out these tips for selling your used equipment.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice by Equipment Trader or any of its affiliates. You should consult your own tax, legal, and accounting advisors before making any decisions regarding your taxes and tax returns/filings.
Arielle Patterson
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