Depreciation: over 3 or 5 years?
March 25, 2006 6:53 PM   Subscribe

What is the benefit, if any, of depreciating a piece of expensive camera gear over 3 years instead of 5?

As a professional photographer I buy (and eventually sell) a lot of camera gear. The digital cameras I buy are always extremely expensive and are essentially obsolete in 2 or 3 years. My accountant has always been resistant to allowing me to depreciate these cameras over 3 years and always does it over 5. Wouldn't it make more sense to depreciate over 3 years and wouldn't I benefit from doing this? By depreciating several items over 3 years would I make myself an audit target?
posted by photoslob to Work & Money (7 answers total)
5 years is a standard IRS depreciation time, 3 years might generate more attention.
posted by b1tr0t at 7:56 PM on March 25, 2006

and, attention == audits.
posted by b1tr0t at 7:56 PM on March 25, 2006

can anyone point out a site that explains depreciation in a way that I can understand? i've google'd it and I just don't quite get the math and the philosophy behind it? it makes sense to me to depreciate a camera that originally cost $8k that 14 months later is only worth $5k and by next year will only be worth $2k over 3 years. am i missing something?
posted by photoslob at 11:04 PM on March 25, 2006

I wouldnt worry a rats ass about depreciating it over three years instead of five. Ask your accountant for his rationale. In the UK (where I practise in Audit) the key consideration in depreciation is the 'useful life of the asset', so three years would seem reasonable in your case as it is essentially defunct after that time. AFAIK the laws applicable for the US are very similar and US GAAP is very similar to UK GAAP (agreed accounting principles).

The one consideration that your accountant may be making (which I would be totally unaware of) is your local tax laws but I dont know how that would impact it. It may just be that he wants to remain consistent year-on-year for tax purposes.

In the UK depreciation is there as a financial accounting concept only. It doesnt affect the profits made from trade as the tax authorities have capital allowances offset against the business and do not take the depreciation policy of the business into account. If perhaps the US authorities allow depreciation an an allowable expense then your accountant may be worried that you are trying to reduce your profit and so pay less tax by taking a bigger hit over a shorter period.

This is a simplistic, quick explanation and it may not cover your local rules but I hope it gives some type of idea.
posted by ClanvidHorse at 3:13 AM on March 26, 2006

Depreciation is a hit against earnings--the more depreciation you can deduct, the lower your profits and the less tax you have to pay (I think. IANAA.). Depreciation times are determined by the IRS and may not have much relationship with reality.

Here's what the IRS has to say about depreciation. I don't think their explanations are really confusing, but I also deal with this type of thing on a near-daily basis, so YMMV. You're paying someone to be the expert on this for you--can't you ask your accountant for a layperson's explanation?
posted by eilatan at 9:08 AM on March 26, 2006

IANAA, I believe you also have the option to expense your equipment instead of depreciating it -- that is, you can take a one-time write-off of the cost in the year you purchase it (or the percentage of the cost that corresponds with the percentage of time you use the equipment for your business -- so say you use a $1000 camera 85% of the time for business use and 15% of the time for personal use, you can expense $850), and be done with it.
posted by scody at 10:38 AM on March 26, 2006

He wants to use five years because the IRS says so.

per wiki: "Under MACRS, all assets are divided into classes which dictate the number of years over which an asset's cost will be recovered." See also their explanation of depreciation.

Also, see the highlighted question on p.8 for someone else's question that might be related.
posted by neda at 11:25 AM on March 26, 2006

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