What happens with the concept of depreciation is that most things (except for land) that are used in any business are are bought at a certain price, and once they begin being used, they no longer are worth that same price. It loses value over time. So when an item is bought, and it is expected to last for a long time, you cannot deduct the full cost all at once, from your business profit line, but you take a little bit off each year. Where straight-line depreciation comes in with regard to commercial loan modification is interesting, and worth the time it takes to understand.
Straight-line depreciation really means you take the number of years you expect the item to last, and subtract and equal percentage each year. Other ways have formulas figure things lose more value at the beginning of its life than later on. For example, you might figure a computer will be equally as good for five years, so just deduct the equal percentage, but a vehicle, loses much more value the first years than in the later year.
When is comes to commercial loans, a building or property that was purchased is generally depreciated for 39 years, figuring a piece of property should last a long long time. Monthly payments and tax obligations are based on a 39 year straight-line depreciation deduction. However, many people do not realize, or are just becoming aware, that you do not need to clump the entire building into this 39 year depreciation schedule.
There are parts of the building that are not expected to last the same length as the building is. These are things that are routinely replaced after 5, 7 or 15 years. What can be done, is to segregate them out and depreciate them by segments on a separate scale.
Often about 20-25% of the property could be separated from the main straight-line depreciation. This then lowers tax obligation because more is taken off on the front end of the loan. For instance carpet is considered a permanent part of the building, but it will never last 39 years as it might need to be replaced every 7 years. A fence on the property may be expected to last 15 years, so the depreciation cost will be spread out over 15 years. This process requires a professional engineering evaluation to identify which parts of the building can be put on a different depreciation schedule.
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