How to Estimate Depreciation Expense on a Tax Return
- 1). Determine the depreciable item's salvage value. The salvage value is the amount you expect the item to be worth at the end of its useful life. For example, if we plan to sell our car as scrap metal for $300 at the end of its useful life, then the car has a salvage value of $300. An item's salvage value can be $0.
- 2). Calculate the total amount you will be depreciating over the asset's lifetime by subtracting the asset's salvage value from its cost. In our example, the total amount of depreciation will be $5000 ($5,300 cost minus the $300 salvage value).
- 3). Divide the amount that will be depreciated by the asset's useful life. This will tell you the depreciation expense for the current year. Returning to our example, we see that the depreciation expense is $1,000 per year ($5,000 depreciation divided by the car's 5 year useful life).
- 4). Complete IRS form number 4562 and submit with your tax return.
