Shop equipment cost: 5 figures to check

For shop equipment depreciation, start with the purchase price and applicable added charges, then check salvage value, useful life and book value.

Key takeaways

Record each item's purchase price separately.
Check added charges before calculating depreciation.
Write down salvage value and useful life estimates.
Check yearly depreciation and book value against earlier records.

Depreciation spreads the cost of equipment over the years you use it, so the cost you choose carries into the years that follow. This post covers 5 figures to check before you set that cost. The worked examples come from OpenStax's accounting textbook. Book figures like these are what you record for your own records; the tax rules further down are a separate question. The numbers in the examples belong to the examples, not to your shop. Run your own invoices and estimates through the same steps, and keep your numbers separate from the textbook numbers so you never mix them up.

Figure 1: the purchase price is the first number

The purchase price is the first number you need. In OpenStax's example, a company buys a drill press for $22,000. That price is only one part of the cost used for depreciation, as the next figure shows.

Start with the invoice for each item. Write down the price, the date, the vendor and a short description of the item, and keep the document with the record. If one bill covers several items, record each item's price separately instead of the order total. A register, a set of shelving and a label printer bought on one invoice belong on separate lines in your records, because each one is its own item with its own cost and its own estimates. If an item has a serial number, note it next to the price. That makes it easier to tell the item apart from a similar one bought later.

Figure 2: the example adds sales tax and delivery or setup

The depreciation calculation in OpenStax's example adds sales tax and delivery and setup to the price. The source puts it this way:

> For example, if our company purchased a drill press for $22,000, and spent $2,500 on sales taxes and $800 for delivery and setup, the depreciation calculation would be based on a cost of $22,000 plus $2,500 plus $800, for a total cost of $25,300.

For your own equipment, go down the invoice line by line. Some charges are easy to sort, such as a line labeled sales tax. Other lines, such as a bundled service plan or an accessory bought at the same time, may need a closer look. Mark each charge as part of the item's price or as a separate cost, and write the reason next to it. Ask your accountant before you decide on the unclear ones.

Figure 3: salvage value is the amount you expect the item to be worth at the end

Salvage value is the amount you expect the item to be worth when you are finished using it. It is an estimate, so write down how you reached it. The same OpenStax section shows how salvage value changes the amount to depreciate:

> For example, if we paid $50,000 for an asset and anticipate a salvage value of $10,000, the depreciable base is $40,000.

A higher salvage estimate leaves a smaller depreciable base, and a lower one leaves a larger base, because the base is the cost less the salvage value.

For your items, use a salvage estimate you can explain. Possible bases include a resale quote from a dealer, the price of similar used equipment you can find, or a note of what you expect to get if you sell the item yourself. Write the basis down with the date you made the estimate. Review the estimate when your circumstances change, such as when you move the item to a new use or when you learn that a similar item sold for a different price.

Figure 4: straight-line divides the depreciable base evenly by years

The straight-line method spreads the depreciable base evenly across the years of use. OpenStax shows a $10,000 cost less $1,000 salvage value, divided by 5 years, giving $1,800 yearly.

You can check the arithmetic by multiplying the yearly amount by the number of years. In the example, the yearly amount multiplied by five years should equal the $10,000 cost less the $1,000 salvage value. If your yearly figure times your number of years does not equal your depreciable base, find the error before you record the figure.

The example uses a machine with an estimated life, and the same source gives both the life and the end value:

> He estimates that he can use this machine for five years or 100,000 presses, and that the machine will only be worth $1,000 at the end of its life.

For a register, scanner, shelving unit or label printer, you will need your own estimate of how long you expect to use the item. Write that estimate down along with the salvage value, because both feed into the yearly figure. If you change either estimate later, record the change and the date you made it, so you can explain the new yearly figure to anyone who reviews your records.

Figure 5: book value is historical cost less accumulated depreciation

Book value is the historical cost less the accumulated depreciation. OpenStax states it this way:

> In this case, the asset's book value is $20,000: the historical cost of $25,000 less the accumulated depreciation of $5,000.

Each year, the accumulated depreciation grows by the amount you depreciate. With the straight-line method, that yearly amount stays the same, so the book value falls by the same amount each year. Check that the accumulated depreciation you carry forward matches the depreciation you recorded in earlier years. If the two don't match, the book value will not match either.

Keep the book value updated for each item. It tells you what the item is still carried at on your records, which can be useful when you are asked about a particular piece of equipment. It also gives you a starting point if the item is sold, traded in or scrapped, since the record already shows how much of its cost has been depreciated so far.

Illustrative example: one register, five figures

A register costs $10,000, with sales tax of $2,500 and delivery of $800, giving a cost of $10,000 plus $2,500 plus $800. You estimate salvage at $1,000 and a life of 5 years, so the depreciable base is the cost less the salvage value, and the yearly figure is that base spread evenly over 5 years. After 2 years, accumulated depreciation is twice the yearly figure, and book value is the cost less that accumulated amount. Write each of the five figures on one line with its date.

How the five figures fit together

Each figure feeds the next, so an error in one carries through the rest. Each example uses its own numbers, and each one stands on its own. Build your own chain from your own invoices and estimates, and keep the steps written out so anyone checking the record can follow them.

Check each figure before you use it

Before you set the cost for the year, check each figure against its source. Some useful checks:

Does the purchase price match the invoice for that item?
Are sales tax and delivery or setup charges listed separately, so you can see what was added?
Is the salvage estimate written down with its basis and date?
Is the estimated life written down, in years or in another unit you can measure?
Does the depreciable base equal the cost less the salvage value?
Does the yearly amount multiplied by the number of years equal the depreciable base?
Does the accumulated depreciation match last year's record?
Is the acquisition date on file, so you can check it against the IRS dates below?

If a check fails, fix the record before you use the figure in your calculation. A small error in one year carries into the book value of the next, so it is worth taking the time to find it.

Common mistakes to avoid

Each mistake below affects one of the five figures, so look for them before you set the cost.

Using the order total for a bill that covers several items, which hides each item's price.
Leaving out sales tax or delivery and setup charges without a written reason.
Writing a salvage value with no basis or date.
Estimating a useful life without writing down what the estimate is based on.
Carrying forward last year's accumulated depreciation without checking the arithmetic.
Applying one IRS line to every purchase without checking the acquisition date.
Mixing the textbook numbers in with your own numbers.

The acquisition date tells you which IRS rule to read

The figures above are what you record in your books. For federal income tax, the treatment follows a different timetable, and the IRS instructions for Form 4562 (2025) use January 20, 2025 as the dividing date for the special depreciation allowance. The instructions contain two lines that read:

> Phase down of the special depreciation allowance for certain qualified property acquired before January 20, 2025, and certain plants bearing fruits and nuts planted or grafted before January 20, 2025.

> Special depreciation allowance for certain qualified property acquired after January 19, 2025, and certain plants bearing fruits and nuts planted or grafted after January 19, 2025.

Check eligibility and the applicable allowance with your accountant. Check the instructions for the year you file, because these quotes come from the 2025 version.

For each item, find the date you acquired it and note which of the two lines it falls under. Keep that note with the invoice, so the date and the reasoning are in one place. A purchase date close to January 20, 2025 is worth a careful look at the invoice and the instructions, since the two lines split on that date. Record the acquisition date on the same line as the cost, so you can see both facts when you prepare the year's figures.

These lines are federal guidance from the IRS. Check any state requirements separately.

Keep a separate record for each item each year

Set up one line for each item with the purchase price, added charges, salvage estimate, estimated life, depreciable base, yearly amount, accumulated depreciation and book value. Add the acquisition date and the location of the item in the shop, such as the front counter or the stockroom. Date each entry and keep the invoice with it. A photo of the item's serial number label can also help if the item is moved or if you need to match it to a record later. For related recordkeeping, see asset tracking settings and shop record retention.

When you set the cost each year, compare the new figures with the old ones. If a number changes, write down why. Changes that come from a new estimate should be easy to spot, and changes that come from a mistake should be fixed in the record, not just carried forward. A clear record makes the next year's check faster, and it helps if someone asks how a figure was set.

Set a yearly date to run the checks

Pick a date each year that fits your own calendar, and go through the items one at a time. Work through the checklist above, update the records and note any new purchases. Add each new item when you buy it rather than at the end of the year, while the invoice is still easy to find. Keep the yearly review in the same place each time so the next person who looks at the records knows where to start.

Bring the record to your accountant before the figures are final

Share the record with your accountant before the figures are final, not after. Ask for the reason behind each decision about cost, salvage value and life, and ask for that reasoning in writing. A written note makes it easier to repeat the same method next year and to explain it to anyone who reviews the records. Keep copies of those notes with the item records.

Today, choose an item, find its invoice and work through the checklist above. Write down any unclear charges or estimates to discuss with your accountant.

Questions to bring to your accountant

Which charges belong in the cost of each item?

Sort each invoice line into part of the item's price or a separate cost, then ask your accountant to confirm your split and explain any line you marked unclear.

How should I judge salvage value and estimated life?

Write an estimate with a basis you can explain, such as a dealer quote or the price of similar used equipment, and date it, then ask your accountant to check it.

Which IRS line applies to my purchase?

Compare your acquisition date with January 20, 2025 in the Form 4562 instructions: a date before it falls under the first line, a date after January 19, 2025 under the second.

How should I record an item that I sell, trade in or scrap?

Bring the item's cost, accumulated depreciation and book value record to your accountant, and ask how to record the change for that item.

This post is general information, not tax or accounting advice. For your own equipment, ask a tax professional or accountant to check the figures and the rules that apply to you.