Should You Replace Fully Depreciated Equipment?

By Lauren Crum Email Lauren

In simple terms, depreciation is recognizing the cost of an asset over a specified period of time. Depreciation begins when the business places an asset in service. The asset ceases to be depreciable when the business has fully recovered its cost or when the taxpayer retires it from service, whichever happens first.

Once a business has fully depreciated an asset, it is not required to dispose of it. If the asset is still in working order, the company is free to keep using it, however, the business doesn't gain a tax benefit from recognizing a depreciation expense. In accounting terms, the company is getting to use the asset for "free" from that point on.

Unfortunately, older assets need more maintenance and will need to be replaced eventually. As a business owner, you should determine if the cost of maintenance and repair is worth holding onto that asset. You should also consider the possibility that purchasing a new asset could improve your efficiency and reduce labor costs. It could give you functionality that would make your business more competitive and improve your sales. Either one of these situations could improve your return on investment and offset the cost of your expenditure.  

Additionally, tax planning can help you determine if the depreciation of new equipment will save you tax dollars.

BKE will work with you and your tax preparer to ensure that the depreciation expense of your equipment is always accurately recorded in your books. We can also provide you with reports that help you make the decisions outlined above.