How to Calculate Depreciation on Furniture

Depreciation is an accounting method businesses use to spread the cost of a tangible asset, like furniture, over its useful life. This acknowledges that assets lose value over time due to wear, obsolescence, or usage. Allocating the cost over several years provides a more accurate financial picture by matching the asset’s expense with the revenue it helps generate. It also offers tax benefits, allowing businesses to deduct a portion of the asset’s cost annually to reduce taxable income.

Understanding Key Information for Depreciation

Before calculating depreciation, identify specific information about the furniture. The initial investment includes its purchase price and any additional costs to make it ready for use, such as shipping or assembly fees. This total is the asset’s “cost basis.”

“Salvage value” is the estimated amount the furniture will be worth at the end of its useful life. This is what a business expects to receive if the asset is sold or scrapped. Salvage value is subtracted from the cost basis to determine the total depreciable amount.

The “useful life” is the estimated period, measured in years, during which the furniture is expected to be used or generate revenue. This estimate is influenced by industry standards, usage patterns, or tax authority guidelines. Useful life directly impacts annual depreciation, as a longer life results in smaller annual deductions.

Common Depreciation Methods

Several methods exist for calculating depreciation, each distributing the asset’s cost differently over its useful life. The “straight-line depreciation” method allocates an equal amount of depreciation expense to each period. This approach is straightforward and results in a consistent annual deduction.

The “declining balance method,” like the “double declining balance” method, is an accelerated approach. It records more depreciation expense in early years and less in later years. This method applies a fixed rate, often double the straight-line rate, to the asset’s book value at the beginning of each year. The depreciation amount decreases as the book value declines.

For tax purposes, the “Modified Accelerated Cost Recovery System (MACRS)” is generally required by the IRS for most tangible property placed in service after 1986. MACRS uses predetermined recovery periods and depreciation rates, and it typically does not consider salvage value. This system often allows for larger deductions in the initial years.

Applying Depreciation Methods Step-by-Step

Calculating depreciation involves specific steps and formulas for each method. For straight-line depreciation, annual expense is determined by subtracting salvage value from cost basis, then dividing by useful life. For example, if furniture costs $5,000, has a $500 salvage value, and a 5-year useful life, annual depreciation is ($5,000 – $500) / 5 = $900.

With the double declining balance method, the depreciation rate is double the straight-line rate. This rate applies to the asset’s book value (cost minus accumulated depreciation) at the start of each year. For a 5-year useful life, the straight-line rate is 20%, so the double declining balance rate is 40%. If furniture costs $5,000, the first year’s depreciation is $5,000 x 40% = $2,000. The second year’s book value is $3,000 ($5,000 – $2,000), and depreciation is $3,000 x 40% = $1,200.

Applying MACRS for furniture uses IRS-assigned recovery periods and depreciation tables. Office furniture typically has a 7-year recovery period. To calculate, find the applicable percentage from IRS tables for the specific year and apply it to the furniture’s cost basis. For example, if furniture costs $5,000, and the MACRS table shows a 14.29% rate for the first year of 7-year property, the deduction is $5,000 x 0.1429 = $714.50. The IRS provides these percentages.

Specific Depreciation Rules for Furniture

Furniture for business use benefits from specific tax rules that can accelerate depreciation deductions. Under MACRS, general office furniture and fixtures are typically classified as 7-year property. Their cost is recovered over a seven-year period for tax purposes, following IRS depreciation schedules.

Section 179 of the tax code allows businesses to deduct the full purchase price of qualifying equipment, including furniture, in the year it is placed in service. This deduction is subject to annual dollar limits and overall investment limitations. For 2024, the maximum Section 179 expense deduction is $1,220,000, phasing out if over $3,050,000 of qualifying property is placed in service.

Bonus depreciation is another accelerated method, permitting businesses to deduct a significant percentage of eligible property’s cost in the year it is placed in service. For qualifying property placed in service in 2024, the bonus depreciation rate is 60%. This rate is scheduled to decrease in subsequent years, reaching 40% in 2025 and phasing out by 2027. Both new and used furniture can qualify, providing an immediate tax benefit.