It takes a lot to go skydiving: passion, bravery, a willingness to step into the unknown. However, all those things won’t matter or take you anywhere if you don’t have the necessary skydiving equipment. These equipment might include a chute, a skydiving AAD, a jumpsuit, altimeter, skydiving goggles, helmet, and many more.
Equipment depreciation, especially for businesses, is referred to as a measure of how much a piece of equipment drops in value each year. As you calculate the depreciation of your skydiving business equipment, you can make wiser maintenance decisions, particularly for older equipment. Although there is no specific rate for such items in the United States, 15 percent can be considered basic for skydiving equipment.
Note that in the United States, equipment depreciation tends to be based on certain information: The initial value of the asset, Its useful life (the number of years it takes to fully depreciate), and its salvage value. Basically, equipment keeps depreciating until it reaches its salvage value, at which point you might sell it or scrap it. The useful life of any equipment could be based on manufacturer information, user estimates, or values assigned by the IRS.
However, as you plan maintenance tasks on your equipment, it helps to know how much of your time and money you should pour into them. Have it in mind that tracking the depreciation of your equipment helps you keep a clear idea of just how much your equipment is worth. Note that for older pieces of equipment, it may not always be worthwhile to repair it when it fails. If the cost of repairs would be more than its current value, it might be a good idea to replace it instead of fixing it.
In addition to the raw value of the asset, depreciation can also be used when calculating taxes. Businesses in the Skydiving Industry can write off the depreciation of their equipment as a business expense, so it could help lower their tax exposure. Howbeit, that fact comes with implications for maintenance planning as well—if you are no longer able to claim tax benefits from an asset, it might be less worthwhile to keep maintaining it.
To get the most out of depreciation, you’ll need to keep track of it on all equipment. Some types of software systems can help you do that. Using depreciation as one of your metrics, you’ll be able to determine the most financially efficient course of action regarding older assets.
Major Ways to Depreciate Equipment in the United States
Typically, deprecation methodically accounts for decreases in the value of a business’s assets over time. In the United States, accountants are expected to comply with generally accepted accounting principles (GAAP) in calculating and reporting depreciation on financial statements.
GAAP is a set of rules that includes the details, complexities, and legalities of business and corporate accounting. There are three methods for depreciation: straight line, declining balance, and sum-of-the-years’ digits methods.
Straight – Line Depreciation
The straight – line method more or less the estimated salvage value (scrap value) of an asset at the end of its life and then subtract that value from its original cost. Note that the difference is the value that is lost over time during the asset’s productive use.
That difference is also the total amount of depreciation that must be expensed. To calculate straight – line depreciation you have to know the cost of the fixed asset. You also need to know the estimated salvage value and the estimated useful life of the asset. You will also have to include the sales tax, shipping and installation costs in the total cost of the asset.
Have it in mind that the salvage value is the amount for which you could sell the item at the end of its useful life. It is subtracted from the expense of the item when calculating the cost that is to be depreciated. However, refer to Publication 946 from the IRS to determine the useful life for the asset.
- Calculate the net cost of the asset by subtracting the salvage value from the cost. Calculate a depreciation rate using the useful life in years. Multiply the cost of the item the depreciation rate to calculate the annual depreciation amount.
- For example, suppose Skydiving Company purchased a plane for $2,000,000 and the plane has a $500,000 salvage value and a five – year useful life.
- Calculate the depreciable asset cost with the equation $2,000,000 – $500,000 = $1,500,000.
- Divide the useful life (in years) into 1 to calculate the depreciation rate. Use the equation 1 / 5 = .2. The depreciation rate is 20 percent.
- Multiply the depreciation rate by the depreciable asset cost to calculate the annual depreciation amount. Use the equation $1,500,000 x .2 = $300,000. The company will record $300,000 of depreciation on the plane every year.
Declining Balance Depreciation
The declining balance method is a type of accelerated depreciation used to write off depreciation costs more quickly and minimize tax exposure. Note that with the declining balance method, management expenses depreciate at an accelerated rate rather than evenly over a scheduled number of years. In the United States, this method is often used if equipment is expected to have greater utility in its earlier years.
This method also helps to create a larger realized gain when the asset is actually sold. In this method, the straight – line depreciation rate is doubled in order to calculate the accelerated depreciation. The accelerated depreciation rate is applied to the book value, or remaining carrying value, to determine the depreciation amount of the asset each year.
For instance, if a straight – line depreciation rate for an asset is 20 percent, then the accountant would use double that amount, or 40 percent, for the double declining balance depreciation method. To do this, you will first calculate the straight – line depreciation rate using the cost, salvage value and useful life of the asset.
In the first year, apply the double depreciation rate to the cost of the asset to calculate the depreciation expense. In the second year and for all the years following, apply the double depreciation rate to the book value (cost – depreciated amount) of the asset. Using the same example as above, suppose a Skydiving Company acquired a plane $2,000, 000 and the vehicle has a $500,000 salvage value and a five – year useful life.
- Calculate the straight line depreciation rate with the equation 1/5 = .2.
- Double the depreciation rate with the equation .2 x 2 = .4. The double depreciation rate is 40 percent.
- Calculate deprecation for the first year with the equation $2,000,000 x .4 = $800,000. This is the amount of depreciation that will be recorded in year one.
- Calculate the book value by subtracting the amount of depreciation already recorded from the original cost. Use the equation $2,000,000 – $800,000 = $1,200,000. This is the amount of the equipment that hasn’t been depreciated.
- Calculate the depreciation amount for year two by multiplying the book value by the accelerated depreciation rate. Use the equation $1,200,000 x .4 = $480,000. This is the amount of depreciation that will be recorded in year two.
- Calculate the remaining book value using the equation $2,000,000 – $800,000 – $480,000 = $720,000. This is the amount that remains to be depreciated.
- Calculate depreciation for year three by multiplying the book value by the accelerated depreciation rate. Use the equation $720,000 x .4 = $288,000. This is the amount of depreciation that has to be recorded in year three.
- Calculate the remaining book value using the equation $2,000,000 – $800,000 – $480,000 – $288,000 = $432,000.
- Calculate depreciation for year four by multiplying the book value by the accelerated depreciation rate. Use the equation $432,000 x .4 = $172,800.
- Adjust the depreciation for year four for the salvage value. Remember that the equipment has a salvage value of $500,000. If you applied the entire depreciation amount of $172,800 to the book value, it would leave you with $259,200, which is less than the salvage value.
- You can only record depreciation up to the amount where the book value equals the salvage value. Therefore the year three deprecation value must be calculated by subtracting the salvage value from the book value using the equation $720,000 – $500,000 = $220,000.
Sum-of-the-Years’ Digits Depreciation
The sum-of-the-years’ digits method offers a depreciation rate that accelerates more than the straight – line method but less than the declining balance method. Annual depreciation is separated into fractions using the number of years of the business asset’s useful life. To Calculate the SYD, multiply the useful life by the useful life + 1.
Divide this product by 2. Divide the number of years remaining in useful life by the SYD to get the depreciation rate for that year. Using the same example as before, suppose Skydiving Company purchased a plane for $2,000,000 and the vehicle has a $500,000 salvage value and a five – year useful life. Use the equation 5(5+1) / 2 = 15.
- Calculate the depreciation rate for year one by dividing the years remaining in useful life by the SYD. In year one, the years remaining in useful life is 5. Use the equation 5/15 = .3333. Apply this rate to the cost of the equipment less the salvage value to calculate the depreciation amount for year one. Use the equation ($2,000,000 – $500,000) x .3333 = $499,950. Record $499,500 in depreciation expense for year one.
- Calculate the depreciation rate for year two. In year two, the remaining years in useful life is 4. Divide 4/15 = .2667. Apply this rate to calculate the depreciation. Depreciation is ($2,000,000 – $500,000) x .2667 = $400,050
- Calculate the depreciation rate for year three using the equation 3/15 = .2. Depreciation is ($2,000,000 – $500,000) x .2 = $300,000.
- Calculate the depreciation rate for year four using the equation 2/15 = .1333. Depreciation is ($2,000,000 – $500,000) x .1333 = $199,950.
- Calculate the depreciation rate for year five using the equation 1/15 = .0667. Depreciation is ($2,000,000 – $500,000) x .0667 = $100,050.
- If you add up all of the depreciation rates for the five years, it comes to 100 percent (.333 + .2667 + .2 + .1333 + .0667 = 1).
- If you add up the total depreciation expense for the five years, it will total the purchase price of the plane less the salvage value, which is $1,499,550 ($499,500 + $400,050 + $300,000 + $199,950 + $100,050 = $1499, 550).
Generally, businesses in the United States leverage different options for depreciating the value of an asset over time. Most companies use a standard depreciation methodology for all of the company’s assets. Howbeit, depreciation methodologies are typically industry – specific. But in order to get the most out of depreciation, you’ll need to keep track of it on each asset. Some types of software systems can help you do that.