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What is Equipment Depreciation?

Equipment Depreciation

Understanding the concept of equipment depreciation or asset depreciation is important for any business dependent on heavy equipment, machinery, or vehicles. At its essence, depreciation reflects the loss in an asset’s value over its useful life, impacting a company’s financial health and strategic decision-making. 

It provides an accurate picture of an asset’s value over time, which is critical for making informed, strategic decisions in areas such as finance, investments, and operations. 

By thoroughly comprehending equipment depreciation (or fixed asset depreciation), you can make informed decisions about equipment replacement, appropriate insurance coverage, and optimizing tax deductions. 

Equipment maintenance and depreciation are closely related, playing a vital role in asset management. Regular upkeep and maintenance planning of an equipment can increase its lifespan, impacting its depreciation rate by spreading the cost over a long period and maintaining its value. 

This relationship helps organizations in the strategic decision-making process, especially when deciding whether to repair or replace aging equipment. 

This blog post explores the definition of equipment depreciation, how to calculate it, the importance of its calculations, and the benefits it offers to businesses.  

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What is equipment depreciation?

Equipment depreciation is the gradual decrease in the asset’s value over the time it is used. It is important to understand that depreciation is an accounting concept that reflects the estimated value of the asset rather than its market value. 

Initially, when you purchase an asset, it holds a certain value. However, as you use it over time, it loses its value due to factors such as wear and tear and obsolescence. This loss of value over time is referred to as depreciation, and it can be calculated in several ways. 

An example of depreciation on IT equipment 

Here’s an example of depreciation on IT equipment. Suppose you bought a piece of IT equipment for $10,000 with an expected equipment lifespan of five years. After using the straight-line depreciation method (one of the methods to calculate depreciation), the value of the asset might decrease to $5000 by the start of the fourth year. If it experiences a major breakdown, requiring $5000 for repairing, one must evaluate whether such investment in repairs is worth it. 

Factors determining equipment depreciation life

Calculating equipment depreciation life involves three primary factors that are explained below: 

Initial asset value

This refers to the original cost of the asset or the purchase price. 

Useful life

This refers to the estimated time over which the asset will be used before it fully loses its value. It also reflects the timeframe over which the asset is expected to remain operational. 

Salvage value

This refers to the estimated residual value of the asset at the end of its useful life. As soon as an asset depreciates to this value, you can sell or dispose of it. 

Essentially, an asset will continue to depreciate until it reaches its salvage value. At this point, you can decide whether you want to sell it or scrap it altogether. The useful life of an asset could be based on several factors; for example, a piece of medical equipment could be based on the manufacturer’s specifications, user estimates, or standard values assigned by tax authorities such as the Internal Revenue Service. 

Factors determining equipment depreciation life

What is an equipment depreciation schedule?

An equipment depreciation schedule is essentially a table that is used to document the loss in value of a certain asset throughout its estimated useful life. The purpose of an equipment depreciation schedule is to keep track of the depreciation values you’ve already deducted. 

While there are slight variations based on the chosen depreciation method, most equipment depreciation schedules include common elements, such as: 

  • Each row in the schedule represents a year. 
  • Book Value at the Start represents the book value of the asset at the beginning of each year before deductions. 
  • Depreciation notes the amount dedicated for depreciation during that year, and it is often referred to as the ‘depreciation expense’. 
  • Book Value at the End signifies the book value of the asset at the end of that year after the depreciation expense has been deducted from it. 

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How to calculate equipment depreciation

The simplest method to calculate equipment depreciation is the straight-line method. 

Here’s the formula: 

(Initial Value – Salvage Value) ÷ Useful Life = Annual Equipment Depreciation

Subtract the salvage value from the initial value of the asset and then divide this amount by the asset’s useful life. Using this formula, you can derive the annual depreciation amount for the equipment. 

For example, if you purchase an asset that costs $10,000 at the beginning of the year, has a salvage value of $3000, and has a useful life of five years, its depreciation amount would be: 

($10,000 – $3,000) ÷ 5 years = $1,400/year

This result indicates that the value of your equipment decreases by $1,400 each year. In simpler words, each year, your equipment loses a consistent amount of its value due to depreciation until it reaches its estimated salvage value at the end of its useful life. 

How to calculate equipment depreciation

Why is it important to calculate equipment depreciation?

Businesses must calculate equipment depreciation as it helps them evaluate the current value of their equipment. On the other hand, it also helps business owners determine how much they should charge for its use and how much money they need to set aside for repairs and replacements. 

Let’s discuss a manufacturing business as an example. As discussed earlier, calculating depreciation helps the business owner decide whether to buy new heavy equipment or continue leasing from another company. 

Suppose a piece of office equipment costs $10,000 to buy brand new or $800 to rent for the year (this makes $9,600 over 12 months), has an expected lifespan of five years, and generates $10,000 in revenue each year during its useful life. 

In this scenario, it would be a good decision for a business owner to purchase the equipment in a brand new condition, not only because it will cover the initial cost but also because it will yield profit over time, making the investment worthwhile.

What are the benefits of calculating equipment depreciation?

Calculating equipment depreciation and understanding its benefits helps you plan for the future, supports informed decisions, and enables you to make better choices about equipment purchases. 

When you’re considering buying new equipment, calculating depreciation can help you evaluate whether the investment is financially viable. It can also serve as a basis for calculating your taxes in case you plan to claim any depreciation in your company’s financial statements. 

A few tips to remember when calculating equipment depreciation

When calculating equipment depreciation, keep these key helpful tips in mind: 

  • Always remember to deduct the depreciation from your gross income. This will enable you to accurately determine your business’s profit or loss for a specific period. 
  • Deducting the depreciation from your gross income provides you with an accurate picture of the actual revenue generated from selling goods and services in a particular quarter or year. 

Final thoughts 

CMMS software can help maintain your equipment in excellent condition and ensure accurate depreciation calculations. 

For instance, EZO CMMS, one of the leading CMMS solutions, can help in several ways; it can help track equipment usage and provide accurate data that helps you evaluate how much of the equipment’s useful life has been utilized, enabling you to calculate depreciation correctly. It can help you reduce wastage and increase productivity with lean construction principles. Other CMMS alternatives are also available like MaintainX and UpKeep. The battle for choosing the best CMMS solution never ends! However, you need to make the right choice!

On the other hand, it also streamlines and automates maintenance scheduling and monitoring tasks to ensure your equipment remains in optimal condition throughout its lifecycle. This prevents early breakdowns or replacements. 

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Sara Naveed
Content Marketing Manager, EZO
Sa-ra · She/her
Sara Naveed is a content marketing expert by profession at EZO, tech enthusiast (especially when it comes to writing about maintenance management) by inclination, and a best-selling author of five novels (courtesy of Penguin Random House) by passion. A groundbreaking Saari Residence fellow (2024), a prestigious writer’s residency of Finnish origin, she was among the first Pakistani authors to earn this distinction. When she’s not working, you’ll find her happily book-bound with a chai or lost in a captivating series on Netflix.

Frequently Asked Questions

  • What’s the simplest way to explain equipment depreciation?

    Depreciation spreads the cost of a long-lived asset over the years it’s used; tax rules in the U.S. commonly use MACRS, while financial reporting under IFRS/GAAP allocates the depreciable amount (cost minus residual) systematically over useful life. Keeping consistent runtime, condition, and service history in EZO CMMS helps your accounting team choose methods and lives that reflect actual use.
  • How is tax depreciation (MACRS) different from book depreciation?

    Tax depreciation follows prescriptive MACRS classes, methods, and conventions (e.g., half-year), while book depreciation (IFRS/GAAP) is based on useful life, residual value, and a systematic method such as straight-line or units-of-production. Because EZO CMMS holds meter readings and utilization, finance can support units-of-production or adjust lives when usage patterns change.
  • Straight-line vs accelerated: which should we use?

    Straight-line is even expense each year; accelerated methods front-load expense to earlier years (tax-favored in many jurisdictions). Choice depends on policy, financial goals, and regulatory rules.
  • What is the units-of-production method and when does it fit?

    It ties depreciation to output or hours: higher use → higher period expense; ideal for wear-driven machinery. Hour meters and counters recorded in EZO CMMS give the auditable basis for this calculation.
  • How do half-year or mid-quarter conventions affect the first year?

    In U.S. tax, conventions like half-year assume assets are placed in service mid-year, generally limiting first-year depreciation; mid-quarter may apply if acquisitions are back-loaded. Accurate in-service dates captured in EZO CMMS (work order/commissioning logs) help your tax team apply the right convention.
  • What changed with U.S. bonus depreciation recently?

    Under TCJA it phased down after 2022; in 2025, legislation (often referenced as the “One Big Beautiful Bill Act”) reinstated 100% bonus for qualified property placed in service after Jan. 19/20, 2025, with a transition election (e.g., 40% for early-2025 placements). Always confirm with your tax advisor. Equipment commissioning evidence and dates from EZO CMMS help substantiate eligibility.
  • Do repairs and maintenance change depreciation—or are they just expenses?

    Routine maintenance is expensed and doesn’t reset depreciation; material improvements that extend life or capacity can be capitalized and may change remaining life. IFRS requires reviewing useful life and method at least annually. Having planned/actual PMs, parts, and failure records in EZO CMMS supports the repair-vs-improvement judgment.
  • What’s the difference between depreciation and impairment?

    Depreciation is the planned allocation of cost; impairment is an unexpected write-down when recoverable amount falls below carrying value. (Think sudden obsolescence, damage, or demand collapse.)
  • How do I pick a useful life that auditors won’t challenge?

    Use manufacturer guidance, observed duty cycles, and peer benchmarks—then monitor actual utilization and revise estimates when facts change (IFRS/GAAP allow prospective changes). Utilization dashboards and meter trends in EZO CMMS make the case for lives that align with reality.
  • Can better maintenance reduce depreciation expense?

    It won’t change tax schedules, but for book, strong reliability may justify longer useful lives or lower residual-value errors over time. EZO CMMS ties PM compliance and MTBF/MTTR improvements to asset longevity so finance can reassess assumptions credibly.
  • What documentation do auditors look for around depreciation?

    They test placed-in-service dates, supporting invoices, useful life rationale, method consistency, and existence/condition via maintenance records. Work orders, commissioning, photos, and meter logs centralized in EZO CMMS give a clean trail from physical asset to ledger.
  • How should we coordinate accounting with maintenance to avoid surprises?

    Set a cadence: maintenance reports unusual failures or upgrades; accounting reviews for impairment or capitalization impacts; both agree on retirement timing. Reddit maintenance leads often note chaos when PM schedules live in spreadsheets. A shared source like EZO CMMS keeps both teams in sync with alerts and asset change histories.
  • When should we retire or replace vs. keep repairing?

    Compare repair trend and downtime cost to remaining depreciable base and expected productivity; rising corrective work and chronic failures are classic triggers to replace.
  • Do different components on one machine get different depreciation?

    IFRS allows component depreciation when parts have significantly different patterns/lives (e.g., a turbine vs. its blades).
  • What’s the practical workflow from shop floor to the fixed-asset register?

    Capture commissioning, meters, and PM compliance in the CMMS → push placed-in-service date and ID to accounting → assign class/method/life → review annually with maintenance data. (IRS/IFRS guidance cover methods; your policy governs choices.) Because EZO CMMS stores usage, failures, and work history, the accounting steps are faster and better defended.

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