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Some explain depreciation to me

Discussion in 'Members' Lounge' started by cheese9988, Oct 26, 2014.

  1. cheese9988

    cheese9988 Senior Member VIP

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    Lets say a company buys a bridgeport for $10k and depreciates this over ten years. That's $1000/year. But what does this actually mean? Does this typically go against a companies P&L? Or is it simply a tax thing? I understand that the resale value goes down over time.
     
  2. civicious

    civicious FüK-VTEC VIP

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    http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/A-Brief-Overview-of-Depreciation

     
  3. get_nick

    get_nick These snozzberries taste like snozzberries... VIP

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    Think about EBITDA

    Earnings, Before Interest, Taxes, Depreciation, and Amortization.

    As your assets age, in theory, they lose value while in service. If you have a 10 year depreciation, you lose $1,000 each year. After 10 years, you can throw it away or sell it. If you sell it, you log the value on your business "t-chart". If you sell for more than you claimed in depreciation, you must register that as a gain.
     
  4. cheese9988

    cheese9988 Senior Member VIP

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    So this this is just a tax deduction to recoup the value of your inventory?
     
  5. get_nick

    get_nick These snozzberries taste like snozzberries... VIP

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    not inventory. inventory is your goods for sale. the correct term is "assets". anything you use for your business can accumulate depreciation. computers, cars and trucks, desks, tooling, cameras, etc. anything else goes into cost of goods sold or g&a (general and administration) expenses.
     
  6. get_nick

    get_nick These snozzberries taste like snozzberries... VIP

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    picture a T-Chart. when you spend cash on assets, your business is worth the same amount, you just have assets instead of cash. each year you accumulate depreciation, the loss of value in your goods. on the other side of your t-chart is the depreciation.
     
  7. SlushboxTeggy

    SlushboxTeggy It's only stupid if it doesn't work VIP

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    I'd add my 2 cents, but @get_nick did a great job explaining it.
     
  8. reckedracing

    reckedracing TTIWWOP VIP

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    depreciation is a way to take the expense for a large purchase over the assets useful life.
    1000/year would be straight line depreciation
    there are many methods of depreciating an asset besides straight line, depending on how you want it to affect your bottom line in any specific year
    depreciation expense comes off the P&L
     
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  9. Briansol

    Briansol Admins Admin VIP

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    This is why I lease stuff :)
     
  10. DarkHand

    DarkHand Senior Member VIP

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    If I spend $10,000 on a piece of equipment, and write off the $1000 in depreciation each year, isn't the IRS essentially slowly paying me back for that equipment over the 10 years?

    EDIT: Part of that equipment, not all of it.
     
    Last edited: Oct 29, 2014
  11. get_nick

    get_nick These snozzberries taste like snozzberries... VIP

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    No, you are reduced $1000 taxable income, not the actual dollar amount of taxes you pay. If you are in a 20% tax bracket, you save yourself from paying 20% of $1000 in profits. So you pay $200 less dollars in taxes.
     
  12. DarkHand

    DarkHand Senior Member VIP

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    Oops I meant they're paying for a percentage of the equipment, not the whole thing. So I pay $2000 less than I would have over 10 years, meaning the equipment really cost me $8000.
     
  13. get_nick

    get_nick These snozzberries taste like snozzberries... VIP

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    Correct. and if you sell for any amount more than you depreciated, uncle sam takes that as a gain. :D
     
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