What is Fixed Asset Depreciation?

Fixed asset depreciation is depreciation that is applied to business assets that are considered to have a fixed rather than a variable value. Assets of this type include property such as heavy equipment, furniture, vehicles, buildings, and real estate holdings. There are actually several different methods for determining fixed asset depreciation, with some methods preferred within specific industries and others favored by governmental tax agencies.

In order to begin the process of calculating fixed asset depreciation, it is important to identify three key pieces of information. The first is the initial cost of the asset. This is often the purchase price, but depending on prevailing laws and standards, the figure may also account for any ancillary expenses that were necessary to complete the purchase. Along with the initial cost, defining the amount of time that that the asset will be useful to the business in terms of years is also important. Finally, identifying the value of the asset at the end of that useful life, sometimes referred to as the salvage value, will also be useful in determining the rate of depreciation.

A basic approach for fixed asset depreciation calls for deducting the salvage value from the initial cost of the asset, and then dividing the result by the number of years of the anticipated useful life. This results in determining how much depreciation in terms of local currency can be claimed during each tax year. In order to aid in this process, many governmental tax agencies provide tables or schedules that make it easy to determine the amount of fixed asset depreciation that may be claimed during each calendar year, until the useful life of the asset is completed.

Other means of determining the fixed asset depreciation relative to the property may involve allowing for the operating hours of that asset. This is often the case with production machinery. Here, the owner would begin with the initial cost, then subtract the salvage value of the asset. That figure in turn is divided by the estimated production or operation hours associated with that machinery. The resulting per hour figure is then applied for every hour that the machine is in operation during the tax year. For example, if the machine is only operated 20 hours per calendar week, the depreciation for the year would be determined by multiplying the per hour figure by 1040 hours of usage.

Since laws regarding the calculation and claiming of fixed asset depreciation vary somewhat from one nation to another, business owners should consult with professional accountants in order to make sure the method used is in compliance with those laws. Doing so eliminates the potential for having to file an amended return at a later date, or possibly paying additional fees as a result of the errors on the initial return. Checking the status of laws regarding fixed asset depreciation at least annually is important, since those laws are subject to change from one tax period to the next.