Each year, the age and wear on tools lowers their value from their original purchase prices. Depreciation estimates the current value of a tool based on its age and replacement cost. Depreciating the cost of tools on taxes allows small businesses to maximize their deductible allowance each year.
Depreciation Formula
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Calculating depreciation takes into account a tools-replacement value and its age to determine what its current cash value is. The formula for this is Actual Cash Value = Replacement Cash Value – (Depreciation Rate * Replacement Cash Value * Age).
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Deduction Formula
Each year, you are allowed to calculate the depreciation of your tools to deduct a portion of their cost from your taxes. To calculate the deduction amount, multiply the purchase price of the tools by the depreciation rate. If a tool is used for only select months throughout the year, this is reflected when determining its annual depreciation. Divide the number of months it was used by 12, and use this formula to calculate your new deduction: Purchase Price * Depreciation Rate * (Months Used/12).
Depreciation Rate and Useful Years
According to the Claims Pages website, for the purposes of depreciating property, manual and power tools both have a lifespan of 20 years and an annual depreciation rate of 5 percent.