Jane V.

asked • 02/17/16

The question is down below... I really don't understand. Please show work and answer.

On federal income tax returns, self-employed people can depreciate the value of business equipment. Suppose a computer valued at $2765 depreciate at a rate of 30% per year. Estimate the number of years it will take for the computer's value to be less than $350

David W.

Important note:  Do not get Income Tax advice from this forum; seek the advice of a professional.
 
Eric correctly describes "30% per year" depreciation.  For each year, this-year's value is 30% less than last year's value.  This may be computed using a table (this is simple with spreadsheet software) or using a formula (much like the interest formula).
 
Marlene is correct only in the case of "straight-line" depreciation  (note: much detail about MARCS and GAAP and starting dates and ... in IRS publications and TurboTax and others).
 
The category of "business equipment," the useful life and the residual value is determined by the IRS, not the company.
 
That being said, treat this as a math "word problem" and use "30% per year" depreciation.
 
If this is a real tax problem, PLZ seek professional advice elsewhere (you really don't want to be audited regarding this).
 
Just f.y.i, the tax code includes much more than depreciation -- there are repairs/enhancements,
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02/17/16

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Marlene S. answered • 02/17/16

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Hello Joanna
 
We have a computer valued at $2765
 
If depreciation is 30% per year, then each year, the computer will depreciate 
2765 x .30 = $829.50
Notice I converted the percent discount to a decimal.
 
 
This depreciation amount is deducted from the depreciated value each year
We begin with the full value of the computer.  So, at the end of the first year, the depreciated value of the computer would be.
2765-829.50 = 1935.50
 
Now, at the end of the 2nd year, the depreciated value is
1935.50 - 829.50 = 1106
Notice I started with the depreciated value at the end of the first year.
 
At the end of the 3rd year, the depreciated value is
1106 - 829.50 = 276.50
 
276.50<350
The depreciated value of $276.50 came after 3 years of depreciation.
 
So, it will take 3 years for the computer's value to be less than $350.
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Eric C.

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Hi Marlene.
 
If it depreciates 30% per year, wouldn't you take 30% from its current value at the end of each year, not its original value every time?
 
So in this example:
 
The computer's original value is $2765. It loses 30% by the end of the year.
 
$2765 * 0.30 = $829.50
 
So your computer's value after year 1 would be:
 
$2765 - $829.50 = $1935.50
 
If it then depreciates by 30% again, it would lose:
 
$1935.50 * 0.30 = $580.65
 
So its new value at the end of year 2 is:
 
$1935.50 - $580.65 = $1354.85
 
This is different from your approach, where you take 30% from its original value every round, whereas in this approach it loses 30% from its value at the end of each year.
 
If it then this loses another 30% from its new value:
 
$1354.85 * 0.30 = $406.46
 
Leaving at the end of year 3:
 
$1354.85 - $406.46 = $948.39
 
End of year 4:
 
$948.39 - $948.39*0.30 = $663.88
 
End of year 5:
 
$663.88 - $663.88*0.30 = $464.72
 
End of year 6:
 
$464.72 - $464.72*0.30 = $325.30
 
So it actually takes 6 years to drop below $350 in value. Is this more appropriate or did I misunderstand?
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02/17/16

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