The depreciation rate of furniture refers to how furniture loses its value over time.
The depreciation rate is used for accounting and tax purposes, and the rules for the rate vary depending on current laws and the type of furniture.
Because there are different methods for calculating the depreciation rate of furniture, it's difficult to pin down a specific number.
Keep reading to learn how the depreciation rate works and three popular calculation methods for furniture depreciation.
The Depreciation Rate of Furniture
Breaking down the term can help you get a better grasp of what it refers to.
Is an accounting term that refers to how the value of an item falls or reduces over time.
A common example of this is vehicles, which are commonly known to drop in value the moment the rubber hits the road.
Refers to the ratio in which the depreciation occurs.
When dealing with the depreciation rate of furniture, you usually look at how the value drops either annually or over the expected life of the piece of furniture.
In this instance, is any movable asset that you use in an office, room, or factory to bring it up to desired working conditions.
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Common examples include:
- Office desks
- Office chairs
Because the furniture will wear down over time, you can write off the depreciation as an expense when filing taxes.
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Which Furniture Qualifies for a Write Off:
Furniture only qualifies as a write off if:
- You own (not rent) the item
- It is used for business purposes
- You can determine the useful life of the piece (with exceptions for historical pieces)
- The useful life lasts at least one year
As long as your furniture meets these conditions, you can move on to calculate the depreciation for a writeoff.
Depreciation Rate of Furniture Variables:
There are plenty of variables that affect the depreciation rate and value of furniture, including:
- Current legislation regarding the matter
- The furniture materials
- The age of the furniture
- The type of furniture
Different details lead to different rates and methods of calculation.
Two office chairs of different build may have different useful life spans based on materials alone, even though they accomplish the same task in the same environment.
Regardless of these variables, you can still use the same basic formulas. The variables only affect the numbers that your plugin.
How to Calculate Furniture Depreciation
There are a few methods for calculating furniture depreciation, including:
- Online furniture depreciation calculators
- Straight Line Depreciation method
- Double declining balance depreciation method
- Sum-of-the-years’ digits method
These calculators and formulas detail how much value the furniture will lose over its expected life, and you can use that number as a write-off during tax season.
These methods are included in the Generally Accepted Accounting Principles (GAAP) and work well to generate a decrease in furniture value.
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Furniture Depreciation Calculator:
Furniture depreciation calculators work best for estimates, but you should not rely on the “plug and play” format for your final numbers.
A furniture depreciation calculator lets you plug in known variables to determine the depreciation of a piece of furniture.
The calculator then runs through the formulas and pops out the number that you need.
The details you need change depending on the method you plan to use, but you should usually know:
- How much you pay for the item
- How long ago did you buy it
- The condition of the item when purchased
- Current condition
More detailed furniture depreciation calculators will ask for specific numbers relating to the useful life of the item.
You should only use a calculator to estimate the number, ideally when making purchasing decisions.
Furniture depreciation calculators do not work for antique or specialty purchases.
Straight Line Depreciation:
Straight-line depreciation offers the easiest calculation.
You subtract the salvage value of the furniture from the original cost, then divide the difference by the useful life.
The formula looks like this:
- Annual Depreciation Expense = (Initial Cost of the Asset - Salvage Value) / Useful Life
As an example, let’s work with a $5,000 boardroom table that has a salvage value of $1,000 and a useful life of 5 years.
- ($5,000 - $1,000) / 5 = $800
This means that the boardroom table drops in value by $800 each year. If you want to turn this into a rate, divide the depreciation value by the original value.
- $800 / $5,000 = .16
The table has an annual depreciation rate of 16 percent.
Double Declining Balance Depreciation:
This method uses the same numbers as straight-line depreciation, but it operates on an accelerated schedule for short-lived assets.
This method depreciates them twice as fast and does not use a uniform rate.
Instead, the early years have larger drops in value while the number decreases with time.
Using the example above, a double declining balance would drop the value by 16 percent of $5,000 the first year, then by 16 percent of the remaining $4,200 the next year.
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The sum-of-the-years’ digits is another accelerated model that sits between the two previous methods. It separates the annual depreciation into fractions.
To calculate depreciation using this method, you start by adding the sum of all the years of useful life. For 5 years, this looks like this:
- 5 + 4 + 3 + 2 + 1 = 14
Then plug this number into this formula:
- Straight Line Depreciation Value x The Year’s Fraction = The Year’s Depreciation
For the first year of a $5,000 straight-line depreciation value:
- $5,000 x 5/14 = $1785.71
Legalities of Furniture Depreciation
The IRS updates depreciation rates of furniture as congress approves different methods. Currently, you should use the Modified Accelerated Cost Recovery System (MACRS).
This system lists different rates for different materials.
Make sure the method used is part of your accounting policy and your entire organization uses this over different periods.
An accountant is best suited to calculate the numbers accurately and in line with current legislation, and they will ensure you use the proper depreciation rate when creating your Profit and Loss Statement.