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 declines by the same amount each year, while the declining balance method causes the computer to lose more value when it is younger and less value as it ages. Either 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 computing depreciation assumes that the value decreases by the same amount each year.
In the straight-line method of calculating 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 then. 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 a year of use. For example, if a computer costs $1,000 United States 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 business and used for income-generating business activities.
For the calculation of the following years, the percentage of the first year must be used. Using the $1,000 example, the second year would be calculated by taking the value of the computer after the first year, $800, and subtracting another $200, making the computer worth $600 after the second year. The third year would be worth $400, the fourth year would be $200, and by the fifth year the computer would have fully depreciated to zero.
The declining balance method of calculating computer depreciation is a bit more complicated. The first step is the same: start with the original value from the computer, but then multiply it by 40%. For a $1,000 computer, this is $400. Subtract the amount from the original price of the computer, giving the computer a value of $600 after the first year. For the second year, take the value from the previous year, 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 in an income-generating business or trade, 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).
