When you invest in furniture for your business, accounting for the expense is important. However, many small business owners don't realize that office furniture is considered a capital investment, which means that you can depreciate the cost of the furniture over time. If you're not familiar with the process of depreciating your furniture, here's a look at the basics that you need to know before you buy.
Determining Cost and Usable Life
The first step to depreciating your furniture purchase is by determining the cost of the furniture and how long you can expect it to last. The Internal Revenue Service declares furniture as having a useful lifespan of eight years. That means that you'll depreciate the cost of the furniture over eight years.
In most depreciation cases, you also need to determine how much the asset will be worth at the end of its useful life. In the case of furniture, the IRS declares it as having no residual value at the end of the usable life, so you'll depreciate the entire cost of the furniture over that eight years. So, if you buy an office set that's worth $8,000, you'll depreciate the $8,000 according to the depreciation method you choose.
Check the IRS depreciation records every year, because the useful life and residual value can change. If there's ever a residual value to consider for furniture, you subtract that residual value from what you spent to determine how much you depreciate over the useful life. For example, if you buy $10,000 worth of furniture with a useful life of eight years and a residual value of $1,200, you subtract $1,200 from $10,000, then depreciate the result over eight years according to the depreciation method you select.
Understanding Furniture Depreciation Options
There are two primary methods for depreciating office furniture. If you're investing in new furniture for your company's space and you want to make the most of that investment, here's a look at how you can maximize your depreciation.
- Straight-Line Depreciation – Like the name says, straight-line depreciation carries the cost of your furniture evenly over the useful life. It's the easiest to calculate, because you simply divide the value of the furniture by how many years of useful life it has. In the case of a $12,000 office furniture investment with no residual value and the eight year IRS lifespan, you'd depreciate $1,500 per year for eight years under this depreciation method.
- Double Declining Depreciation – If you've decided to depreciate your new office furniture through the double declining method, the calculation is a bit different. You'll calculate the depreciation amount each year based on how much depreciation has accumulated already. The formula is 2 divided by the useful life of the furniture times the current furniture value. The current value is the total cost less any accumulated depreciation. Here's how it works: if you just purchased $12,000 worth of furniture with an eight year useful life, the first year's calculation is: (2/8)x12,000, which results in $3,000 depreciation expense the first year. The second year, the formula would be (2/8)x9,000 (because you'd subtract the $3,000 in accumulated depreciation to arrive at the current value of the furniture). This results in $2,250 in depreciation the second year.
New office furniture can change the way that your office space looks and feels for your employees, and it can change the impression the office space gives to customers and clients. Before you visit the local furniture manufacturer for new office furniture, though, you need to be sure that you understand exactly how to depreciate that investment over time. Talk to your furniture providers, like D&R Office Works, Inc., about the best furniture for your needs to ensure that you get the useful life you wanted from your furniture.