View Full Version : Equipment Depreciation
02-28-2004, 07:28 PM
I'm curious as to how you fellows that have been in this business for some time figure the depreciation on your equipment, particularly mowers. I'm smart enough to know my Gravely isn't going to last forever, but I can only guess at what the actual depreciation runs. I suspect hours of use probably mean more with regards to depreciation than age. If that is true, what percentage of the new price do you figure per hour?
Also, how do most of you handle replacement of your machines? Do you wear them out, put X number of hours on them, trade on a whim, or when the warranty runs out? Based on your experience, when is the most economical time to trade? Thanks.
02-28-2004, 07:37 PM
I plan on running my mowers into the ground. My dad bought a 48 in WB scag back in 1985 and ran it until 1995 then sold the mower for $1,000.
I have a 61 in Z-turn and a 36 in WB. I hope they last me 10 years. I also think a lot of it depends on how you take care of your equipment.
02-28-2004, 09:35 PM
I am not sure if this is what you are asking, but I depreciate 100% of cost the year I put the mower in service using section 179.
Concerning replacements , I have in the past run things around ten years before replacing. I now believe four years is about the time that frequent breakdowns begin to occur and most equiptment should be replaced about this time. It is cheaper to replace a mower all at one time than buy exspensive replacement parts, pay repair bills or work on your epuitment all the time when you could put that energy into your yardsand get paid for it. l
02-28-2004, 11:56 PM
As long as you have income, you can depreciate up to $100k of equipment in the year your buy it. Those limits change each year. There is also bonus depreciation available. But these special depreciation amounts are limited--depending on your income. You can depreciate it using other methods and not take section 138k (bonus depreciation) or section 179. You can choose a straight line method over say 7 years, but mostly people are using a double declining balance method now.
02-29-2004, 01:34 AM
Our larger machines I think will last 10 to 12 years. Push mowers are 2 years . Handheld stuff is also 2 years. I dont spend more than $100 on handheld repairs, 200 on push mower repairs. I buy new one and save old ones for parts. I think its cheaper.
02-29-2004, 07:50 AM
Be careful how you depreciate equipment.... best bet to NOT trigger an audit is to use the 200% declining straight line over 7yrs. Taking the 100% sec 179 with an income of less than 100k gross will throw up a BIG RED flag. Although only .045% of most businesses are audited :p its still a good idea to not put something on there that will make the go HUuuuummmm.
02-29-2004, 08:13 AM
I do not see section 179 triggering a audit personally, I have done this for twenty two years and have yet to be asked for a audit. I would think this method is the most advantages for most people involved. Miisytheaccountant do you have any thoughts on section 179 triggering a audit?
02-29-2004, 08:13 AM
Thanks for the replies. A bit of "serendipity" here, I think, as I was not in the least, thinking of the tax angle when I penned the original post. But, appreciate the input regarding that.
A couple of you touched on what I was trying to learn, but I realize now I didn't phrase my original question properly. What I was really asking is, how do you figure your "hidden" costs per hour? In other words, how much value does my mower lose each hour of operation? I realize these costs vary, but I'll bet many of you have a pretty good handle on them. Let's just say, as an example, my mower will cost $8,000 to replace when I decide to do so, and I do that at approximately 1000 hours. What can I realistically expect to get out of the mower either selling it, or trading it in. (I take very good care of equipment). Thanks
02-29-2004, 09:02 AM
Ok MOTurkey, let's see if I can help you out. For IRS purposes (a couple of years old, not sure if the schedule has changed since then), depreciation on equipment such as a mower is 14.29% for the 1st year, 24.49% for the 2nd year, 17.49% for the 3rd year, 12.49% in the 4th year, and 8.93% in year 5 - for a 7 year depreciation schedule, which is what my accountant at the time recommended.
Of course this is for tax purposes, but it can be used to figure a cost of business per hour. I did this by calculating how many weeks per year I would be mowing, then how many hours per week. This gave me a total hours per year that I then divided into the amount of deprecation for the year. In other words, 26 mowing weeks per year @ 36 hours/week = 936 hours/year. If my mower costs $8,000, and 1st year depreciation is 24.49%, then I lose $1959.20 of value in the 1st year. $1959.20/936 hours = $2.09/hour of mowing. Of course this is based on depreciation as defined by the IRS and doesn't take into account residual value.
This is purely for a budget. If you wanted real life figures, you could use your 1000 hour life expectancy.
Whoops, just reread your post a little more carefully. I would guess the best way to estimate residual value is to check and see what similar mowers with 1000 hours on them are selling for. You might be able to demand a premium for you mower based on your care. I doubt there's a very good formula for determing the residual value accurately for trade in as there would be so many variables such as time of year, etc. I imagine the lease companys use a formula similar to the IRS one to determine residual value at the end of the lease.
sorry for being so long winded, I should have read more carefully before responding.
02-29-2004, 09:23 AM
my accountant told me that taking all the depreciation up front does not necessarily create an audit flag...expec ially when its apparent that the buisness is in its first couple of years.
also asked him about expensing the cost of my office in my home. I had read/heard that this also can create a BIG red t flag. He told me no it wont. Said hes been doing the office expense for years and has not seen a single audit..he does ask a few pointed ?'s about your office and if you cant give him the answers he needs to hear, he wont allow expensing it
02-29-2004, 10:15 AM
My accountant said the 179 won't cause any red flags, and there is no more risk using it than not. I've always used 179 for equipment. Don't have to bother with depreciation, take it all at once. The whole reason why Bush enlarged the limit is so businesses would spend money, why not use it? And why would they raise the limit only to target people who did use it?
As far as useage goes, I use 'em till they break. Some of the smaller stuff, though, I've put aside as back ups recently. My oldest blower and wacker became backups when I bought new stuff.
My big mowers I might have to replace soon. They are having more problems the older they get. Like an old car, once it starts costing you $$ it's time to replace it.
02-29-2004, 10:41 AM
MTD..good point you made about the tax law being changed to ENCOURAGE businesses to buy new equipment and expense it the same year..bottom line is they want to spur monies spent on capital assets.
02-29-2004, 10:54 AM
I think though, that cars and computers and other 'listed' items still require depreication.
179 is a great tool for the small business owner. And I do find that I am encouraged to spend knowing I can write the whole thing off in one year. As long as I have the cash, that is!
02-29-2004, 01:32 PM
I know what you mean by cash, but for others reading this who may be newbies, I think you mean 'income', not 'cash...cant right off more than you have in income
02-29-2004, 05:20 PM
Yeah. As long as I've got the income to justify it.
02-29-2004, 06:03 PM
A point on home office deduction. My accountant said its not worth it. If and when you sell your home you have to pay all those property taxes back.
02-29-2004, 06:06 PM
we dont get into heat elec taxes etc....only the sq footage of the office as a % of the total sq ft of the living areas. That % against the monthly mortgage amount is the deduction. THe only thing the room is used for is business
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