How to Calculate Depreciation on Furniture

Furniture purchased for use for a legitimate business purpose can be deducted to adjust the gross income of taxpayers, whether they are filing taxes as individuals or as a business, according to Section 62 of the IRS tax code. As per IRS rules, furniture purchased for business purposes can be depreciated over seven years, but there are three primary ways that a depreciation rate can be calculated.

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Straight-line Depreciation

Straight-line depreciation is the simplest way to depreciate business furniture, with a single adjustment that may be required in the first year. This depreciation method divides the cost of the furniture purchase by the seven-year schedule, resulting in equal deductions each year. For example, the straight-line method would depreciate a $35,000 furniture purchase in seven equal parts of $5,000 per year.

In this example, if the furniture is put into service for a business during the first applicable tax year, the half-year convention is applied. This allows for 75 percent of the first year's depreciation to be declared, which would reduce the deduction in the first year to $3,750. The deduction would be $5,000 for the remaining six years.

Accelerated Depreciation

Accelerated depreciation allows business owners to take larger deductions in the first few years following a furniture purchase, and smaller ones at the end of the seven year deduction schedule. Also referred to as the Modified Accelerated Cost Recovery System, the calculation for this option triples the straight-line depreciation amount. In the first year the total deduction is halved, based on the half-year convention rate for this option. In subsequent years, the amount that has been depreciated is subtracted from the remaining balance, divided by the number of years left in the depreciation schedule, and multiplied by three.

For example, the first year deduction for a $14,000 purchase of furniture for business use would be $2,000 multiplied by 3 for a total of $6,000. The total then is halved to $3,000 for the first year deduction. In the second year, $3,000 is subtracted from the purchase price, leaving $11,000. That total is divided by 6, which is the number of years remaining in the depreciation schedule. The result of $1,833 is multiplied by 3 for a total deduction of $5,500 for the second year. In the third year, the total depreciation taken so far, $8,500, would be subtracted from $14,000, with the result divided by the remaining five years. That total is then multiplied by 3 for the deduction in the third year. The business owner can convert the remaining balance to straight-line depreciation at any time during the seven year schedule.

Section 179 Depreciation

Section 179 of the IRS tax code allows for the full deduction of the cost of purchasing business-related furniture, with a limit of $25,000 for 2015. If the purchase exceeds the upper limit as set by IRS rules, the business can take the full $25,000 deduction, plus straight-line depreciation for the balance. For example, a business spends $32,000 on furniture and opts to depreciate it using the section 179 formula. In year 1, the business would take the $25,000 in depreciation as allowed by the code, plus $1,000 in the straight-line depreciation rate of $7,000 over seven years. The total deduction for the first year would be $26,000, with a depreciation rate of $1,000 per over the next six years.

Tip

Generally speaking, a business that is just getting started and has a low level of income may not be able to maximize the value of the larger up-front deductions provided by accelerated and Section 179 depreciation rates. Under these circumstances, straight-line depreciation may deliver more tax savings. Before making the final decision, consult your tax professional for the depreciation method that will provide the most tax savings for your business.

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