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How do I Calculate Computer Depreciation?

By Stacy C.
Updated May 16, 2024
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Basic computer depreciation, which is how much monetary value a computer has lost over time, can be figured two ways: the straight-line method and the declining-balance method. The straight-line method assumes the value of the computer decreases by the same amount every year, while the declining-balance method has the computer losing more value when it is newer and less value as it ages. Either of these methods can be used to calculate computer value, which is typically done for tax purposes.

In the the straight-line method of calculating computer depreciation, just two pieces of information are needed: the price of the computer when it was originally purchased and how many years it has been since that time. For the first year, take the original purchase price and multiply it by 20%. Subtract that number from the purchase price, and the resulting number is how much the computer is worth after one year of use. For example, if a computer cost $1,000 US Dollars (USD), multiplying it by 20% is $200. $1,000 - $200 = $800. The value of the computer after one year of use is then $800.

To calculate subsequent years, the first year’s percentage must be used. Using the $1,000 example, year two would be calculated by taking the computer’s value after the first year, $800, and subtracting another $200, making the computer worth $600 after the second year. The third year would result in a value of $400, the fourth year would be $200, and by the fifth year the computer has depreciated entirely, to a value of zero.

The declining-balance method to figure computer depreciation is a bit more complicated. The first step is the same: start with the computer’s original value, but then multiply that 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 previous year's value, in this case $600, times 40%, which is $240. Subtract $240 from $600, giving a value of $360 after the second year.

In the U.S., in order to claim computer depreciation on taxes, the claimer must own the computer, use it for a business-related venture or activity that generates income, and it must have a useful life of more than one year. Form 4562 must be used when declaring depreciated items on a federal tax return. More information on this procedure can be obtained from the Internal Revenue Service (IRS).

FAQ on Computer Depreciation

What is computer depreciation and why is it important?

Computer depreciation refers to the gradual loss of value of a computer over time due to wear and tear, obsolescence, or changes in technology. It's important for businesses and individuals for tax and accounting purposes, as it allows for the cost of the computer to be spread out over its useful life. This process can reduce taxable income by accounting for the expense of the computer as it ages and becomes less valuable.

How do I calculate the depreciation of my computer?

To calculate computer depreciation, you can use methods like straight-line depreciation, where the cost of the computer minus its salvage value is divided by its useful life. For example, if a computer costs $1,000, has a salvage value of $100, and a useful life of 5 years, the annual depreciation would be ($1,000 - $100) / 5 = $180 per year. Other methods include declining balance and sum-of-the-years'-digits, which accelerate depreciation.

What is the typical useful life span of a computer for depreciation purposes?

The Internal Revenue Service (IRS) generally considers the useful life of a computer to be 5 years for depreciation purposes. This is based on IRS guidelines and may vary depending on the type of computer and its usage. Businesses often follow this standard for consistency and compliance with tax regulations, although actual usage life can differ based on technological advancements and personal usage patterns.

Can I claim computer depreciation on my taxes?

Yes, you can claim computer depreciation on your taxes if you use the computer for business or income-producing activities. The depreciation expense is deductible over the computer's useful life, as determined by the IRS or other tax authorities. It's important to keep detailed records of the purchase price, date of acquisition, and usage to support the depreciation claim.

Does the method of depreciation I choose affect my financial statements?

Yes, the method of depreciation chosen can significantly affect financial statements. Straight-line depreciation will result in consistent expense amounts each year, while accelerated methods like declining balance will result in higher expenses in the early years and lower expenses later. This choice impacts net income, asset values on the balance sheet, and can influence financial ratios and indicators used by investors and creditors.

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Discussion Comments

By anon1005458 — On Sep 01, 2021

I don't necessarily agree with this.

Depreciation in computer hardware has to do with availability of the said hardware to replace if parts break, and also the popularity at its release time.

If you have a $1000 computer that was very popular when released, therefore replacement parts are easy to find, therefore increasing resale value dramatically.

Also, the overall reliability of the hardware also plays a big role. Once unboxed, a computer loses 10% of its value, and then loses 20% after 2 years has passed. The 20% isn't calculated from the original price, but from the final value you had once unboxed.

After 4 years, computers can lose as much as 50% to 60% of their original sale value without taxes.

On a laptop, for example: the value had to be calculated on parts that factor into the price of this model, such as processor performance loss over the years and graphic processor performance, as well.

High performance CPUs and GPUs depreciate less over the years because their performance is still relevant, even five years later.

However, an entry level processor depreciates very fast. For example, a $3,000 gaming laptop would still be valued about $2,000 five years later. However, the aggressive marketing of new products makes it less likely to sell at $2k but $1.5k is more than a good deal.

However, a five-year-old Intel core i3 with integrated GPU bought for $1,000 is not going to be worth more than $250, unless there is something better at $250 brand new.

By anon956462 — On Jun 13, 2014

It's flawed, though. Your computer won't be worth anything after four years. I dug up an old computer and had people offering to pay more than I asked. Consider parting out older ones. You can get more money for them, but it is more work. You may be surprised how many people like to tinker with older parts.

By Markerrag — On Jan 26, 2014

I'd argue the declining-balance method is the most accurate because computers lose their value in a hurry as technology advances. Just ask anyone who has bought a top of the line machine what happens to it in a few months -- that's right, it's merely a good computer that has been bested by something newer and faster.

When it comes to the value of assets for tax purposes, there are some obvious advantages with the declining-balance method because companies tend to buy a lot of computers at once. The tax hit will be less with the declining-balance method and one can justify using it, too.

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