Recent Developments in IT Equipment Capital Depreciation

Dec 19, 2020

When it comes to the capital depreciation of equipment within a company’s data center, accountants and IT leadership often find themselves in disagreement. Accountants may argue that the value of data center assets are related directly to the depreciated value of the assets, while IT experts view the equipment through a lens of functionality more than monetary value.

However, everyone involved can agree that keeping the data center up and running is of utmost importance, meaning equipment replacement is going to happen when it’s needed and understanding the value of replacement equipment is crucial.

Capital Depreciation and Accounting: What You Need to Know

Typically, the costs of a company’s assets will be spread over a period of years directly related to how long that asset is expected to be utilized for company function. This spread will be reflected in the company’s books and the company will record tax write-offs accordingly within the cap of $500,000. However, the Tax Cuts and Jobs Act of 2017 (effective 2018) increased the depreciation rate of data center assets and boosted the yearly cap to $1 million, effectively doubling the depreciation value of business assets.

This change does not apply to every state, as some states follow local law for depreciation rates. However, the change is significant for smaller businesses that spend less than $2.5 million each fiscal year on capital assets.

What Are the Benefits of This Act?

Increased depreciation rates mean that your company can write off assets within the same year rather than spreading the costs across multiple years, meaning that you’ll see the difference on your taxes sooner. You are also less likely to pose a liability risk for tax reasons, allowing you a greater amount of accessible operating capital (this is especially useful for startup companies).

You can also make the choice to keep two separate sets of books for your company, one for general accounting and one specifically for taxes. This allows your company to use the increased depreciation rate 100% for tax purposes, decreasing your liability and increasing your write-off.

Tariffs on IT Equipment: What it Means for Your Company

Companies dedicated to the development of new software have historically outsourced their processes when company profits have faltered. However, this means a rapidly expanding international data center market with constantly shifting opportunities depending on local tariffs and even local political complications.

Some IT experts push for an increased tariff on technological imports from China. Many other countries within the global IT market choose to purchase their equipment from China instead of the U.S. due to their lower costs. Therefore, increasing tariffs on Chinese IT imports may seem like the best move to make for U.S. profitability.

However, higher costs will reduce the productivity of data center developers, drawing out the wait between new improvements in capital assets. Additionally, in order to keep customer costs on par with international market competitors, services will have to be cut within provider companies and domestic competition will be limited.

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