How to Calculate Capital Expenditure Depreciation Expense

by Sherrie Scott ; Updated April 19, 2017
A business can deduct the depreciated value of a capital asset.

A fixed business asset such as furniture, equipment or an office building is considered a capital expenditure. Unlike operating expenses, which receive tax deductions in the year the expenses occur, a firm must depreciate capital expenses over the life of the asset. To properly depreciate capital expenditures, a firm must know the original cost of the asset as well as the length of time the asset will be useful to the business.

Step 1

Determine the original capital expenditure you made to purchase the asset and the asset's salvage value.

Step 2

Subtract the original value of the capital expenditure from the salvage value of the asset to determine the depreciation total. The salvage value is the estimated market value of the asset or the amount the asset can sell for at the end of it's useful life. For example, a business purchases new office furniture for $5,000 and expects the furniture to last for five years. At the end of five years, the business expects the salvage value of the furniture to be $1,500. The depreciation total in this example would be $3,500.

Step 3

Divide the depreciation total by the estimated useful life of the expenditure. In this example, the estimated useful life of the furniture is five years. Depreciate the asset in equal amounts each year. In this example, $3,500 dived by five years is $700 per year.

Tips

  • Depreciating capital expenditures properly can maximize a firm's cash flow. Estimating depreciation costs and potential savings before a purchase is made can help a business identify which assets are suitable investments. Business accounting professionals often have tax depreciation calculators that estimate depreciation deductions for fixed assets. These calculators enable the business to weigh the tax savings of different assets before making a purchase.

    Sell the asset at the end of its useful life for its salvage value if possible. Report either a gain or loss of the sale of the asset on IRS Form 4797, Sale of Business Property.

References

About the Author

Sherrie Scott is a freelance writer in Las Vegas with articles appearing on various websites. She studied political science at Arizona State University and her education has inspired her to write with integrity and seek precision in all that she does.

Photo Credits

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business letter asking for donationsdifference between npv and irrcontact banana republic credit cardbactrim for abcessed toothcustodial parent taxeshow much does a vision exam costw4 0 allowanceskbb used car value tradeamount of tax taken from paycheckwhat does ad valorem meanfurniture donations marylandsynonym of instilladvantages of deficit financingimportance of accounting conceptscoupons for bealls outlethud assisted living for seniorsconvertible subordinated debenturewhere can i sell blood plasma for moneythe balance in the prepaid rent accountcon edison paymentquit claim deedswhat does dda mean in bankingledger balance in bank accountbad credit loans with a cosignercsc on debit cardapply paypal bill me laterapply at mcdonaldsbond coupon rate calculatorbuying shares in nikelost deeds land registrytexas unclaimed money websitedual citizenship taxesroth ira earnings taxablefidelity investments 401k terms of withdrawaldeposit money in atm different bankhow to file taxes with last pay stubhud owner occupant definitioncheckbook register exceladjustment for accrued salariesdwp pay billtreasury bonds examplesgift ideas for graduating high school seniorsbanks that accept american expressyahoo finance quotes delayedficaeecosigning for a car loanpt-61 form georgiapay fpl bill online with credit cardballoon car loansample 1099-ringress and egress easement definitiontax write offs for insurance agentsmy readydebit cardcash out 401k to pay student loanshow to apply for a sears cardbeta of debt formulafha vs fannie maemature students grantsstockholders equity accountsgrants for biracial studentshow to prove income self employedhow to write cheque canadastatute of limitations on debt in marylandaarp delta dental insurance plan808 credit scorehome equity loan on condogeico postpone automatic payment1040a instruction27.5 year depreciation calculatorunemployment severancebadgercare requirementsdishwasher donationwomen's shelter atlanta gatransfer ira to spousehealth insurance premiums pre-taxwhat happens after baker acthow much it cost to notarize a letterhow to fill out personal allowance worksheetcar loans for minorsjohn hancock 401k cash outsec fasbhow to get out of repaying student loansnc capital gains taxwww hchdonline comcredit card lookup issuing bank
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