Utilize Half-Year Depreciation

by Greg DePersio

1 min read

One depreciation option often overlooked entails recording half a year’s worth of depreciation expense in the year of purchase. For example, if a company purchases a company vehicle with a useful life of five years for $10,000, it normally records $2,000 of straight-line depreciation each year. With the half-year election, a company records $1,000, or half of $2,000, in the year of purchase; $2,000 each of the next four years; and $1,000 in the final useful year of the asset’s life. There are multiple reasons a small business opts for this choice. First, it requires less calculations. A small business does not need to pinpoint the precise day the asset started being used. Second, this option allows for consistent depreciation across all assets. If a company purchased three vehicles, they could all have the exact same depreciation treatment regardless of when the assets were purchased. Finally, a company’s expenses get recognized over a longer period allowing for more stable financial statements. This option is most applicable for assets with heavy use in the beginning of their useful lives. In this case, a company effectively records depreciation beginning in July even if the asset was purchased later in the year. This method is most effective in material situations for items with useful lives greater than three years. In addition, many software modules monitor this option if elected. If you are looking for a way to streamline depreciation reporting and make calculations easier, consider the half-year depreciation option.

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