Sometime the IRS doesn’t seem to be living in the real world – depreciating new computers over a five-year period is one example.
It’s not that business computers aren’t pretty much obsolete in five years, but the fact is that computers depreciate in value even faster than new cars (see The Depreciation Game by Charles W. Moore for more on that). Computers should be depreciated on an accelerated schedule.
Moore’s article takes a good look at the situation and concludes that a computer loses anywhere from 40% to 50% of its value the first year. Yet the IRS wants businesses to depreciate computers like any other five-year asset – at about 20% per year.
That’s half the real depreciation rate. My $2,600 TiBook won’t be worth $2,080 in January 2002. If I’m lucky, it will be worth $1,500-1,600 then. On its depreciation schedule, the IRS says its value won’t decline to $1,560 until January 2003, at which point my TiBook will have a real world value of $1,000 or so.
The IRS should take a long hard look at computers in the workplace and develop a more realistic depreciation schedule, which might have different categories for laptops, desktop computers, and computer systems – or they might find that they all depreciate at about the same rate and offer a single depreciation schedule that recognizes most businesses replace computers within 3-4 years of purchase.
Instead of linear depreciation, the IRS could adopt an accelerated schedule that might look like this, reducing value by 40-50% each year over a four- or five-year period:
|Year 1||Year 2||Year 3||Year 4||Year 5|
Such a depreciation schedule would more closely reflect the value of business computers in the real world.