For any business looking to deduct the depreciation cost of an asset, determining its salvage value is a necessary step as the purchase price less the salvage value must be spread out over the assets useful life. Let’s dig in and discuss how these items factor in.
What is Salvage Value?
Salvage value is defined as the value of the asset after all accumulated depreciation has been realized, or for all practical purposes what the asset will be worth after its useful. In other words, an items salvage value aligns with what it can be sold for once it’s reached the end of its useful life.
Calculate Salvage Value (for Depreciation)
While there are sites which offer a “salvage calculator”, these provide broad estimates, and inferior to the more intuitive approach of estimating an items value based on a little research.
Step 1: Collect your data
Collect the data that matters – purchase price, and calculate useful life of the asset. This information should be easily accessible. In the case of a vehicle estimate how many miles it will have on it by the end of its useful life (e.g. 14,000 miles per year for 5 years = 70,000 miles). You’ll need this information later to estimate salvage value.
Step 2: Research and Estimate Value of your Asset after its useful life.
This is where the effort lies in the form of research. Use the websites and tools at your disposal to estimate the value of your item after its useful life – look at marketplaces, look at sites that project this value, look at what similar items are selling for today. Nobody has a crystal ball, but there is a plentiful information – consider referencing prices on eBay, Facebook marketplace, Kelly Blue Book, etc.
Salvage Value Calculator Example
For an example, let’s use the example of a 2013 Mercedes-Benz Sprinter work van purchased by a business for $36,000, with a 5 year useful life (see link above where we explain where this information can be found).
Purchase Price: $36,000
Useful Life: 5 years, 70000 miles
Salvage Value: Looking at the sale prices for 2013 Sprinter work vans on eBay, Craigslist, Cars.com, and Kelly Blue Book we see sale price ranging from $8,000 to $14,000 depending on condition. In our case we gave weight to estimated value projects from Kelly Blue Book, and we sampled 10 eBay auctions and ads from Cars.com and Craigslist local markets which left us with this table:
Based on our research of 10 comparable vehicles, with the projected mileage we anticipate having on our asset after its useful life, we may safely conclude that a $10,000 salvage value is reasonable, fact-based, and a supprtable conclusion.
Salvage value = $10,000 after 5 years and 70,000 miles
When it’s time to select a depreciation method, consider enlisting the help of a CPA as depreciation can be complex, and this is merely an introduction. An experienced CPA will be able to guide you through the process, avoiding costly mistakes along the way.