Equipment is depreciated over a period of time in order to help a business recover the cost associated with purchasing large assets. The cost of assets such as buildings, office equipment, vehicles and machinery is recovered through depreciation expense.
Depreciation is a loss in value of an asset over time. The idea behind depreciation is that an asset is useful for a specified period of time and must be replaced at the end of that time. According to tax law, based on the type of asset, you may deduct as an expense a portion of the cost of the asset. This is known as the depreciation expense. A depreciation expense offsets income to reduce your tax liability for the fiscal year.
The Internal Revenue Service outlines assets that can be depreciated. Real estate used as a rental property, equipment, vehicles, and large assets. Even items such as software and office equipment are depreciated as an expense over a specified period of time. The amount of time that an asset is depreciated over is outlined by IRS guidelines.
A forklift truck is a piece of heavy equipment that is used in manufacturing and factories to move large objects. According to publication 946: How To Depreciate Property, a forklift is an exception which falls under the category "Other Property Used for Transportation". This category of equipment falls in the five-year depreciation range as a five-year property. This means that you have five years to depreciate the cost of the equipment on your taxes. IRS form 4562: Depreciation and Amortization is used to claim depreciation expenses on your taxes for most depreciable assets.
When an asset is sold, you are taxed on the gains of the sale. You are allowed a basis, which is the value that you paid for the asset, to offset the sale in order to determine the gains. However, if you depreciate the asset, the depreciation taken is subtracted from the basis when the item is sold. So, for instance, if you buy a rental property for $100,000 and you take $30,000 worth of depreciation on the asset over the years, then you sell the property for $200,000. You would then realize a gain of $130,000. This is the sale price minus the purchase price, plus depreciation taken. Before taking depreciation as an expense, take this into consideration, as an asset's sale may cost more in taxes than the depreciation saves.