An often-overlooked depreciation method can help your small business at tax time. This accounting principle entails recording half a year’s worth of depreciation expense in the year of purchase. In essence, you write off the decline in value of certain items, such as a vehicle, heavy machinery, or furniture, in a six-month period.
How to Use Half-Year Depreciation
For example, if your company purchases a vehicle with a useful life of five years for $10,000, you normally record $2,000 of depreciation each year. Accountants call this ordinary method straight-line depreciation. When you use depreciation for half a year, your company records $1,000, or half of $2,000, in the year of purchase. You follow that up with $2,000 each of the next four years on your taxes. Lastly, you state the final $1,000 in the final useful year of the asset’s life.
You can only record half-year depreciation if you treat your purchase of the business item as if you put it into service at the mid-point of year. That means you can only depreciate this item for six months in the first year and six months in the last year of use.
Why Should You Use Half-Year Depreciation?
You have multiple reasons to opt for half-year depreciation. It offers more consistent and precise depreciation across all your assets. Your company recognizes its expenses over a longer period of time, allowing for more stable and accurate financial statements because you depreciate the item for six months at the end of its usable life.
Another advantage to half-year depreciation is you don’t have to keep precise records as to when you put your depreciable item into service. You can use half-year depreciation whether you began using the equipment on March 1 or sold it on November 1, so long as your business remains consistent with this type of property. Depreciation for half a year works best for assets with heavy use in the beginning of their useful lives. In this case, you effectively record depreciation beginning in July, even if you purchased the asset earlier in the year. Recording items this way works best for those with useful lives greater than three years.
In addition, modern accounting software monitors this option if you choose to go this route. When you want to streamline depreciation reporting and make calculations easier, consider the half-year depreciation option. QuickBooks Online tracks expenses so you can more easily depreciate your business purchases come tax time. Keep your books accurate and up to date automatically. Change the way you manage your finances with QuickBooks now.