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Partial-Year Depreciation & Changes in Estimates

Partial-Year Depreciation & Changes in Estimates
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  • 0:01 Taxes
  • 0:33 Depreciation
  • 2:43 Partial-Year Depreciation
  • 3:45 Change in Estimate
  • 5:09 Lesson Summary
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Lesson Transcript
Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

This video lesson will teach you about depreciation calculations for taxes and how to calculate partial-year depreciation for large items that you own for just part of the year. Learn how changes in estimates may affect these calculations.

Taxes

You own a small business selling flower arrangements to people in your local neighborhood. You guarantee same-day delivery for purchases made before ten am. You can do this because you own your own delivery vehicle, and you have an employee that makes all the deliveries for you. Another year has passed, and it is time again to do your yearly taxes. Of course, you don't want to pay more taxes than you have to and you want to make sure your taxes are filed accurately.

Depreciation

One of the provisions that the government gives businesses is that you can take depreciation on your business vehicle. Depreciation is the value lost each year that you own a particular item. Cars, for example, lose value every year.

For example, if you buy a car for $24,000, you can't sell it for $24,000 because as soon as you use the car, it starts to lose value. With each passing year, your car is worth less and less. Because of this loss in value, the government allows you, a business owner, to claim this loss on your taxes so you don't have to pay taxes for this loss for your business.

Taxes are complicated, and there are charts that you need to refer to so that your depreciation calculations are correct. For the sake of this video lesson, though, we will make just a sample depreciation calculation. Don't rely on this calculation, though, to calculate your own taxes.

So, let's do a sample calculation for the depreciation of the delivery vehicle for your flower business. Say you bought the vehicle brand-new the year before in November for $40,000. The vehicle has an estimated life of ten years. You plan on keeping the vehicle for the life of the vehicle. So, your depreciation is based on this life of ten years. At the end of the ten years, your vehicle is considered to have a value of zero dollars. Based on this information, you divide the $40,000 (the original value of the vehicle) by ten years (the life of the vehicle) to calculate the per year depreciation of this vehicle. $40,000 / 10 = $4,000. So, each year you can claim a depreciation loss of $4,000 for this vehicle, if you've owned the vehicle for the whole year.

Partial-Year Depreciation

This means that if you've owned the vehicle for just part of the year, then you can't claim the full $4,000 for the depreciation. You would need to calculate the partial-year depreciation, the depreciation for an item used just part of the year.

For example, the previous year, you owned the vehicle for just two months, November and December. To calculate the amount of depreciation for just these two months, we take the full-year depreciation, divide it by the number of months in a year (12), and then multiply it by the number of months we've owned the item for. So, for your vehicle, since you owned it for just two months that year, you would take $4,000, the depreciation for the full year, divide it by 12 and then multiply it by 2. Doing that, you get $666.67 for this year's partial-year depreciation.

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