When you buy a new piece of equipment, it doesn't stay new forever. It loses value every year from wear and tear until it completely breaks down. This is called depreciation. Managing depreciable assets properly can make a big difference for your bottom line.

What Are Depreciable Assets?

Nearly everything is a depreciable asset. There are only a few rare assets that gain value as they get older, like collectible cars. Everything else breaks down and loses value over time. A new car is worth more than a 2012 version of the same model.

In accounting, particular assets have designated lifespans. For example, cars, computers and construction equipment are expected to last five years, according to Intuit. Office furniture lasts seven years.

While you don't need to know all the ins and outs of depreciation, there are three situations when deprecation should factor into your business decisions.

Impact 1 — Buying and Selling Equipment

Depreciable assets typically lose value quickly after you buy them. Heavy equipment and trucks lose between 20 percent and 40 percent of their value after 12 months of use, according to Ritchie Bros. Auctioneers. Once you get through that immediate drop, assets lose value more slowly year after year until they eventually become worthless.

Avoid selling equipment right after you buy it because you're going to take a big loss thanks to the immediate depreciation hit.
On the other hand, buying used equipment can be an opportunity. If you know from experience that used equipment will still be effective for years, you can get your equipment basically at half price by buying pieces that are a year or two old.

Impact 2 — Insuring Your Equipment

Depreciation is also important for your auto and equipment breakdown insurance. If your car or a piece of equipment breaks down, you need to get a new one so you can get back to work.
Here's the thing; not all insurance policies will pay for a new piece of equipment. It depends on how your policy was set up. Some insurance policies ignore depreciation and will pay for a new replacement, even if your property has lost value. These are called replacement policies.

Others only pay on the actual value of your property when it breaks down. Since depreciable assets lose value every year, you'll get less than the price of a new piece of equipment or car. If your car only has a value of $5,000, you'll just get a check for $5,000 even though buying a new car will cost much more.

Check the terms of your insurance. If it's only actual value coverage, make sure to have some extra savings to make up the difference because your insurance will not pay full price for a new car or piece of equipment.

Impact 3 — Planning Tax Deductions

When you buy depreciable assets for your business, you get a tax deduction for the cost. You have a couple ways to claim the deduction. One option is to take everything upfront, so you get the entire deduction in the first year. You can also spread the deduction over the life of the asset. If you buy a new truck for $40,000 with an expected life of five years, you can spread your deduction evenly over five years, or $8,000 a year.

This might be a better approach if you are just starting out and don't have much taxable income. It would be better to save your deductions until later, when your income taxes are higher rather than taking the entire deduction now. You should talk with your accountant to figure out when you'd get the most value for your depreciation deductions.

Depreciation for business owners doesn't have to be complicated. By understanding these common scenarios, you'll be prepared for the financial impact of your depreciable assets.